Should You Invest in Pre-Need Educational Plans?

Imagine you’re an OFW who’s been saving up for your children’s future college education through an educational plan and you woke up one morning reading this headline:

“Special Report: Prudentialife Plans Inc. (PPI) collapse dashes dreams of 245,000 policyholders”

Imagine if half of PPI’s policyholders are Filipinos working overseas. OFW’s would surely be crying buckets of tears and cursing heaven and hell over this nightmare after breaking backs and paying the premiums for several years for the sake of their children’s education.

What’s Going On with Educational Plans in the Philippines?

The good news is that parents should really not look at pre-need plans as scary legal scams. These pre-need companies and their educational plans are supposed to be safeguarded and monitored tightly by both the Securities and Exchange Commission (SEC) and the Insurance Commission (IC).

The bad news is that, despite the signing into law of the Pre-Need Code of the Philippines by Gloria Macapagal-Arroyo in 2009, there seems to be a confusion going on between the SEC and the Insurance Commission as to the regulatory responsibility over these pre-need companies closing shop.

One of the issues that the Insurance Commission seeks is the further enhancement of the Pre-Need Code. It allegedly says they were not consulted and asked for inputs by our honorable Congressmen (ehem) when they drafted and passed the Code.

The Insurance Commission also proposes to transfer to them the authority to liquidate of a failed pre-need company’s “corporate assets” instead of the designated courts. That’s acceptable and logical since it is assumed that IC has more expertise in financial matters than the courts.

One good damage control that the IC has decided to do is to not issue new licenses to companies who may want to continue selling open-ended policies or those traditional plans that promise to pay in full tuition fees in the future regardless of amount.

Remember CAP? Those days should be gone. It’s just that the IC came in late to rescue PPI since it was already experiencing trouble when the monitoring responsibility was still with SEC.

Why Parents Should (Not Yet) Get Pre-Need Educational Plans

I am not supposed to scare parents, guardians, and educational sponsors who are planning to get an educational plan for their children. But while these safeguards being requested by the Insurance Commission are yet to be granted by the government, I personally recommend you to check beforehand the Insurance Commission website to verify if the educational plan company you are dealing with is authorized and is in good financial position.

But the bottomline is, parents who have no further means and time to learn about investing in other financial instruments to grow their money intended for their children’s college education, a pre-need educational plan is supposed to be a great discipline-builder and saving mechanism. You are required to set aside just small amounts on a regular basis in the hope (and it is guaranteed) that you can receive more in the future.

Unlike other investment vehicles like UITF’s and mutual funds, a planholder can not just redeem the money that he/she contributed unless the payments are completed. You can only withdraw or redeem the invested amount upon maturity.

Another good thing about educational plans is that the benefits increase in value way above the inflation. They may also have “cash bonuses”, insurance benefits, and some other gifts and gimmicks depending on the pre-need company.

Like an insurance product, the earlier you pay for it the less expensive the educational plan premiums. Don’t overwhelm yourself by putting all your savings in educational plans. Select and pay only the plan that you can afford.

But…if you are not comfortable dealing with pre-need products after all that have happened to CAP and Prudential Plans, you might consider learning how to invest in other financial instruments in order to cover your children’s college education costs. Especially if you are looking at 10 years or more before your child goes to college.

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P.S. 1. Bro. Bo Sanchez has appointed me as a coach for our young and new investors at the TrulyRichClub social site. It’s a fun, learning family with the purpose of “helping good people become rich”. I’m inviting you to join the TrulyRichClub too and email me at burngutierrezblog@yahoo.com.ph if you have any questions. Click here to join!

P.S. 2.  I’m inviting you to attend our entrep webinar called “Negosyo 101 for OFW’s: A Crash Course on Entrepreneurship and Business Development“ on September 28, 2013 at 3PM (Philippine time) with our ever reliable personal finance blogging celebrity Fitz Villafuerte. This online seminar is cool and fits (Fitz!) those who are based abroad and either wanting to grab business ideas or just expand/grow their existing ventures. You can get more details of the webinar by clicking here.

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