Prudentialife Bankrupt: Should We Avoid Pre-Need Plans Altogether?

Another one bites the dust! 

Effective February 6, 2012, the Insurance Commission ruled a “stay order” for Prudentialife Plans, Inc. The stay order just means that payment of claims was suspended until further notice. 

Prudentialife has found itself in financial difficulty and is seeking approval for a proposed rehabilitation.

If you can’t recall them, here’s a sampling of pre-need companies that went under:

• College Assurance Plan Philippines, Inc.
• Pacific Plans, Inc.
• Platinum Plans Philippines, Inc.
• Professional Group Plans, Inc.
• Pet Plans, Inc.
• Legacy Consolidated Plans, Inc.
• Permanent Plans, Inc.

Apparently, this is not the end of it. The regulatory agencies revealed that more pre-need companies are facing similar financial difficulties.

That could spell more hard times for pre-need companies. It’s also very bad news for the planholders of those companies in trouble.

What exactly are pre-need plans?

In layman’s terms, pre-need plans are contracts in which planholders get future benefits in exchange for cash installments. 

The most common types of pre-need plans are:

• Life Plans – guarantees funeral services (it appears more like a Death Plan to me)
• Pension Plans – guarantees cash benefits supposedly for retirement needs
• Education Plans – guarantees education expenses usually for college courses

In all these plans, the idea is quite simple. Customers pay cash (usually on installment basis) and they get guaranteed benefits in the future.

Of course the benefits the customers would be promised to get should be worth more than what they would be paying for. If not, no one would buy these plans.

But in order for pre-need companies to keep these promises, they would need to earn the difference plus a little more for profit. They do this by investing the money they receive from their planholders.

How did the pre-need companies fail?

But simple as it may seem, pre-need plans can fail to deliver. Prudentialife states the following reasons for their failure:

1. They overpromised the benefits
2. Global financial crisis diminished returns on investments
3. SEC regulations were unreasonable
4. International accounting standards were adopted too early
5. Their permit to sell was revoked
6. Public lost confidence in pre-need
7. Pre-Need Code was also unreasonable
8. Massive termination of plans due to panic by planholders

Would it still make sense to invest in pre-need plans?

Although pre-need outlook has never been bleaker, it’s being noticed. The government has transferred its regulation from the SEC to the Insurance Commission (IC) in 2010. Stricter rules are also being implemented to ensure strong financial standing of pre-need companies.

The strict rules, however, may also result to further collapse of those that are troubled right now - just like what happened to Prudentialife. 

We, therefore, need to be cautious before we trust pre-need again. We have to make sure that we invest our hard-earned money not because the product looks great. More so, we ought to look at the company selling the products. 

Specifically, we need to see their financial standing and historical performance. Signs of weakness could harm us if we are not careful.

What I think will happen to Pre-Need

I believe that the pre-need industry will undergo a painful but necessary overhaul. More pre-need companies will face disaster and die. But better regulations will ensure the pre-need companies of tomorrow will be more able to deliver their promises.

In the end, we should see a robust pre-need industry, financially stable companies, and trustworthy pre-need products. 

In the meantime, it wouldn’t hurt to look at some other options to fund your future needs.