Financial IQ: Reliability of life insurance?

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Financial IQ Philippines Quick Hit(s):

Yes, life insurance from major life insurance companies is very reliable.


Is life insurance still reliable after the troubles of AIG, CAP & PACIFIC plans?


I’ve been offered life insurance, but I feel it’s no longer reliable. I feel that depositing my savings in the banks might be safer due to the government’s PDIC guarantee. I read about AIG in the US having troubles a couple of years ago, and local firms like CAP and Pacific Plans. I want to also ask if the many victims of CAP, Pacific Plans, etc., can ever get justice or their money back?


Atty. Floro Q. Casas, 31 years old, married, Placer, Masbate


Answer


The problems CAP and Pacific faced are not related to the life insurance industry. Both had problems with their pre-need companies, which sold open-ended pre-need education plans. Open-ended pre-need education plans are securities that guaranteed the college education of a child regardless of the cost of education. This model worked during the time when tuition fee increases were regulated by the Dept of Education. However, when tuition fee increases were allowed to operate under free-market pricing (meaning, schools can increase their tuition fees at rates which their target market is willing to pay), CAP and Pacific found themselves holding on to contracts that provided guarantees difficult to estimate.


As for AIG, their troubles are rooted in their non-traditional investment division, which provided guarantees to sub-prime assets. Their life insurance operations per se were not problematic. However, since both belong to the AIG conglomerate, the insurance operation was likewise affected.


Allow me now to tackle the most important issue you raised: the reliability of insurance. The concept of insurance is all about risk protection, management thereof and eventual transfer of that risk to mitigate the potential effect on your person. If you choose not to secure an insurance cover, you choose to absorb the full effect of the risks you are exposed to. Such risks could involve dying too soon, dying too late, loss of economic value due to disability or poor health, loss of income due to accidents, etc. Insurance companies provide the means for the transfer of such risks from an individual/organization to an insurance company, which is in a financial position to absorb the impact of said risks. In other words, you get insurance so an institution with more financial capability than yourself can share or absorb the risks you are exposed to.   Insurance companies continue to be reliable. Even in the aftermath of several financial crises, the latest of which was the sub-prime, these insurance companies continue to operate and fulfill their contractual obligations.


Should you or should you not transfer risk? I believe it makes sense for anyone to do so since most of the risks we are exposed to are real. The key is to choose the insurance company you will entrust your hard-earned money to. 

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