I previously wrote a blog on why it is important to spell the difference between a pre-need firm versus a life insurance company. With a string of unfortunate events on pre-need companies that started with College Assurance Plan in 2008, followed by Yuchengco-owned Pacific Plans in the same year and Legacy Group in 2009, and lately, Prudentialife Plans, our clients can’t be blamed for being resistant and cautious with investing in such organizations.
To us, financial advisors of big life insurance companies, we want to “avoid the stigma” of being interchanged or mixed up with our pre-need counterparts. But reasonably to our clients, they want the assurance of getting their claims when that appropriate time arises.
So what can be the back up plan?
Is there an alternative out there when clients still want to invest in a vehicle that will allow them to fund future educational expenses of their children, or save up for retirement that will allow them to have money to augment their savings and use when they retire, or prepare for death which is inevitable?
My recommendation is to invest in mutual funds or unit investment trust funds (UITFs) that are being offered by life insurance companies. While the withdrawal and protection benefits are NOT guaranteed, since they are determined by the investment performance of the underlying assets, the yield (which is significantly higher than what the banks’ savings rates offer) will be able to make your pool of money bigger to fund your financial requirements in the future.
Other advantages in investing in mutual funds/UITFs:
- The fund is highly diversified, thus lowering the risk of investment.
- The fund relieves the investor from administering the investment.
- The fund is managed by highly experienced professionals and are very well knowledgeable about risk management.
- The investor can start with low investment capital (some allow 10k start-up funds).
Typically, mutual funds have a medium to long-term investment horizon. Financial advisors recommend that at least the client keeps the money in the fund for at least 5 years. Aside from avoiding the penalty or surrender charges that are usually incurred in the early years of the investment period when one partially or fully withdraws, the fund is proven to grow considerably over a longer period of time.
When preparing for an educational fund, usually the parents purchase plans when the kids are either newly born, or when they are in their toddler years.
Planning for retirement usually happens (especially for the more forward thinkers) at the age of 30-35 years old when reality hits the working professionals that they really do need to save up for their retirement years and they can’t be working forever.
The timeline for these future financial requirements actually matches the investment horizon of mutual funds which is minimum of 5 years up to 10, 15 or 20 years. Of course, one has to consider his or her own level of risk tolerance. The client always has to be in the know of the market conditions affecting the performance of the fund.
I personally recommend also those mutual funds that have an insurance component embedded on the plan. This kind of investment allows the client some flexibility to choose the higher value between the guaranteed death benefit or the account value of the fund. For me, if for some reason the fund crashes (w/c is unlikely over the long term) into less than half of its value, the client is assured to get the insurance component which is a % of its initial investment. (Assumption here is that something happens to the insured i.e. death) In any case, if this will be the preferred investment vehicle, the beneficiaries can be the children or the spouse, of which they can utlimately use the settlement funds for education and pension.
So, it’s really a win-win situation here🙂
For more guidance, you may consult your financial advisors or email me at firstname.lastname@example.org.