Pre-need Code Regulation Act Philippines

State policy and interpretive rule

The State’s policy is to regulate the establishment of pre-need companies and place their operations on sound, efficient and stable basis (Section 2).
The State regulates pre-need companies to derive the optimum advantage from mobilized savings and to prevent and mitigate, as far as practicable, practices prejudicial to public interest and for the protection of planholders (Section 2).
Regulation is carried out through an empowered agency using prudential principles to promote soundness, stability and sustainable growth of the pre-need industry (Section 2).

Key definitions and covered industry

The Insurance Commission is defined as the “Commission” (Section 4).
“Pre-need plans” are contracts, agreements, deeds or plans for planholders that provide for future services, payment of monetary considerations, or delivery of other benefits at actual need or the agreed maturity date, in exchange for cash or installment amounts with or without interest or insurance coverage, and include life, pension, education, interment, and other plans determined by the Commission (Section 4).
A “pre-need company” is a corporation registered with the Commission and authorized/licensed to sell or offer to sell pre-need plans, and includes schools, memorial chapels, banks, nonbank financial institutions and other entities insofar as their pre-need activities are concerned (Section 4).
A “planholder” is any natural or juridical person who purchases pre-need plans from a pre-need company for whom or for whose beneficiaries benefits are to be delivered as stipulated and guaranteed; the term includes the assignee, transferee and any successor-in-interest (Section 4).
A “beneficiary” is the person designated by the planholder as recipient of the benefits in the pre-need plan (Section 4).
The Code defines additional concepts including contract price, benefits, sales counselors, affiliate of / affiliated with, trust fund, pre-need reserve liabilities, liquidity reserve, fixed value plans, in-force plan, lapsed plan, cancelled plan, scheduled benefit plans, contingent benefit plans, and risk-based capital (Section 4).

Commission authority, supervision, and powers

All pre-need companies are under the primary and exclusive supervision and regulation of the Insurance Commission (Section 5).
The Commission is authorized to reorganize, streamline structure and operations, and upgrade human resources to perform functions and exercise powers under the Code (Section 5).
Commission positions are governed by compensation/position classification systems and qualification standards approved by the Commission, with a compensation plan comparable to BSP and other government financial institutions, subject to periodic review no more than once every two (2) years (Section 5).
The salary and allowances/personal services expense of Commission employees are sourced from retained fees/charges/other income from regulation of pre-need companies and from the Insurance Fund under Section 418 of Presidential Decree No. 612 and Section 286 of the National Internal Revenue Code, with appropriation to the General Appropriations Fund if not covered (Section 5).
The Commission may approve, amend, renew or deny licenses/registrations/certificates; fix and assess fees/charges; and regulate/supervise/monitor pre-need operations and management to ensure compliance (Section 6).
The Commission may demand conversion of trustee investments to cash or other liquid assets to protect planholders’ interests (Section 6).
The Commission may issue cease and desist orders, issue subpoena duces tecum and ad testificandum, order examinations, search and seizure of records, and punish for contempt in accordance with the Rules of Court (Section 6).
The Commission may impose sanctions, institute cases, and/or prosecute offenders for violations of the Code and related laws/rules/orders (Section 6).
The Commission may suspend or revoke licenses, enlist government enforcement agencies, and take over noncompliant pre-need companies through appointment of a conservator, receiver or liquidator (Section 6).
The Commission may prepare/approve/amend/repeal rules and issue opinions and guidance, formulate policies/recommendations for the industry, and retain and utilize up to PHP 100,000,000.00 of regulatory fees/charges/other income in addition to its annual budget (Section 6).

Corporate licensing, governance, and plan registration

The Securities and Exchange Commission (SEC) shall not accept or approve articles of incorporation and bylaws of a pre-need company unless there is a favorable recommendation of the Commission (Section 7).
A foreign corporation may engage in pre-need business in the Philippines if it complies with pertinent laws, rules, and regulations (Section 7).
Amendments to a pre-need company’s articles and bylaws, including merger, consolidation and dissolution, require favorable recommendation from the Commission for SEC approval (Section 8).
A pre-need company incorporated after the Code’s effectivity must have minimum paid-up capital of PHP 100,000,000.00 (Section 9).
Existing pre-need companies must comply with minimum unimpaired paid-up capital based on types of plans sold:
- PHP 100,000,000.00 if selling at least three (3) types of plan,
- PHP 75,000,000.00 if selling two (2) types of plan,
- PHP 50,000,000.00 if selling a single type of plan (Section 9).
Existing pre-need companies with traditional education plans must have minimum unimpaired paid-up capital of PHP 100,000,000.00 (Section 9).
The Commission may adopt risk-based principles on capital adequacy and may prescribe a higher minimum unimpaired paid-up capital for pre-need companies (Section 9).
No person shall operate as a pre-need company or engage in the business unless licensed by the Commission (Section 10).
A pre-need license expires one (1) year from registration and may be renewed upon compliance with prescribed requirements (Section 10).
Renewal is deemed approved if not acted upon within thirty (30) days from filing of the renewal application (Section 10).
The Commission prescribes qualifications/disqualifications of directors/officers (including actuaries), and may disqualify/unfit persons and disqualify/suspend/remove directors or officers who commit or omit acts that render them unfit (Section 11).
Directors/officers must satisfy “fit and proper” standards considering integrity, experience, education, training, and competence (Section 11).
The following persons shall in no case be allowed to serve or act as officer, employee, director, consultant or sales counselor of any pre-need company (Section 11):
- Any person convicted of any crime involving any pre-need plan, security or financial product;
- Any person convicted of an offense involving moral turpitude or involving fraud or embezzlement, theft, estafa or other fraudulent acts/transactions;
- Any person enjoined by court/quasi-judicial/administrative order from acting in fiduciary roles;
- Any person found by the Commission to have willfully violated or willfully aided/abetted/counseled/commanded/induced/procured violations of the Code, Insurance Code, Securities Regulation Code, or related laws/rules/orders;
- Any person judicially declared insolvent or incapacitated to contract;
- Any person found guilty by a foreign court/regulatory authority/government agency of acts/violations similar to enumerated misconduct.
First-instance conviction is treated as sufficient ground for disqualification (Section 11).
Pre-need companies must have at least two (2) independent directors or twenty percent (20%) of board members, whichever is higher (Section 12).
Independent director means a person other than an officer, employee, or person with fiduciary relation to the pre-need company, its parent/subsidiaries, or any relationship that may interfere with independent judgment (Section 12).
Directors and officers cannot have, after election/appointment, investments exceeding PHP 5,000,000.00 in any corporation/business undertaking where the pre-need company’s trust fund has an investment or financial interest (Section 13).
Relatives of directors/officers within the fourth degree of consanguinity or affinity cannot invest more than PHP 5,000,000.00 in any such undertaking during incumbency (Section 13).

Registration and approval of pre-need plans

Within forty-five (45) days after grant of a license, and for every pre-need plan intended for public sale, a pre-need company must file with the Commission a registration statement for sale of pre-need plans (Section 14).
The Commission promulgates rules governing plan registration and required documents, including a viability study with certification under oath of a pre-need brochure, a copy of the pre-need plan, and information/documents for protection of planholders and the public (Section 14).
Commission rules must also set conditions under which registration may be denied, revoked, suspended or withdrawn, and provide remedies for pre-need companies (Section 14).
Registration requires documents including:
- duly accomplished registration statements,
- board resolution authorizing registration of the applicant’s pre-need plans,
- opinion of independent counsel on legality of the issue,
- audited financial statements,
- viability study with certification under oath by a pre-need actuary accredited by the Commission,
- copy of proposed pre-need plan,
- sample of sales materials (Section 15).
Registration statements and sales materials must contain appropriate risk factors as determined by the Commission (Section 15).
The Commission sets accreditation standards for actuaries responsible for the viability study; it defines actuary obligations and liabilities (Section 16).
No actuary engaged by a pre-need company may be a stockholder or director, CEO, CFO, or other position that creates an inherent conflict of interest as determined by the Commission (Section 16).
All contract forms, including amendments, relating to pre-need plans require Commission approval; no pre-need contracts/certificates may be issued or delivered in the Philippines unless in previously approved form (Section 17).
Pre-need plans must be advertised and sold in an appropriate non-misleading manner under Commission rules (Section 18).
Advertising by a pre-need company or its pre-need plans is unlawful unless the Commission has approved the advertising material (Section 18).
The Commission must approve or deny advertising material within ten (10) working days; failure to act within that period results in approval (Section 18).
Any person selling or offering to sell in violation of the advertising rule is liable to the purchaser who may sue to recover the consideration paid with interest thereon (Section 18).
A pre-need company that violates the advertising section is subject to a fine of PHP 100,000,000.00; a second violation results in suspension of the license in addition to the fine (Section 18).
No registered pre-need plan may be sold unless an information brochure filed with the Commission is provided to the purchaser (Section 19).
The brochure must explain principal features, state that the planholder may avail of a default or reinstatement period with conditions, and include rates of return for scheduled benefit plans and illustrative yields for contingent benefit plans, plus other Commission-required information (Section 19).

Sales counselors and general agents licensing

No sales counselor may solicit, sell, or offer to sell pre-need plans unless licensed by the Commission (Section 20).
A sales counselor’s license requires:
- good moral character and no conviction of any crime involving moral turpitude;
- completion of a Commission-approved training program certified under oath by a duly authorized representative of a pre-need company;
- passing a written examination administered by the Commission.
Examination administration may be delegated to an independent organization under Commission supervision (Section 20).
A sales counselor license automatically expires every thirtieth (30th) day of June or such date fixed by the Commission and may be renewed (Section 20).
The Commission may deny an application or suspend/revoke a sales counselor license on grounds including:
- materially misrepresented statements in application requirements,
- obtaining/attempting to obtain the license by fraud or misrepresentation,
- materially misrepresented terms and conditions of plans the person sold/offered to sell,
- soliciting/selling via false or misleading representations and fraudulent means,
- termination for cause from another pre-need company,
- similar grounds in Section 11,
- willfully allowing use of one’s license by a non-licensed or barred individual,
- analogous circumstances (Section 21).
If a pre-need company engages a general agent to undertake plan sales, the general agent must be licensed by the Commission under requirements set by the Commission (Section 22).

Plan default, reinstatement, termination

All pre-need contracts must include a grace period of at least sixty (60) days for planholders to pay accrued installments, counted from the due date of the first unpaid installment (Section 23).
Nonpayment during the grace period renders the plan a lapsed plan (Section 23).
Any payment after the grace period must be reimbursed forthwith unless the planholder duly reinstates the plan (Section 23).
The planholder must have at least two (2) years from lapse of the grace period, or a longer contract period, to reinstate the plan (Section 23).
The issuer may not cancel plans during the period when reinstatement may be effected (Section 23).
Within thirty (30) days from expiration of the grace period and within thirty (30) days from expiration of the reinstatement period (two (2) years from lapse of the grace period), the pre-need company must give written notice that the plan will be cancelled if not reinstated within two (2) years (Section 23).
Failure to give either notice prevents the pre-need company from treating the plans as cancelled (Section 23).
A planholder may terminate a plan at any time by giving written notice to the issuer (Section 24).
Pre-need plans must contain a schedule of termination values that the planholder is entitled to upon termination; the schedule must be fair, equitable, and compliant with Commission issuances (Section 24).
Termination values must be predetermined by the actuary upon application for plan registration and must be disclosed in the contract (Section 24).

Claims settlement and plan proceeds

A pre-need company may not refuse without just cause to pay or settle claims arising under its plans and may not engage in unfair claims settlement practices (Section 25).
The following constitute unfair claims settlement practices if committed without just cause (Section 25):
- knowingly misrepresenting pertinent facts or plan provisions relating to coverages at issue,
- failing to acknowledge with reasonable promptness pertinent communications respecting claims,
- failing to adopt and implement reasonable standards for prompt investigation,
- failing to provide prompt, fair and equitable settlement of claims where liability is reasonably clear,
- compelling planholders to sue or recover amounts due by offering substantially less than amounts ultimately recovered in suits brought.
Evidence of number and types of valid and justifiable complaints to the Commission is admissible in administrative or judicial proceedings under this section (Section 25).
Violation of this section is sufficient cause for suspension or revocation of the company’s certificate of authority (Section 25).
For scheduled benefit plans, proceeds are paid immediately upon maturity unless payable in installments or annuity, in which case installments/annuities are paid as they become due (Section 26).
Refusal or failure to pay within fifteen (15) days from maturity/due date entitles the beneficiary to collect interest at twice the legal interest for the duration of delay, unless refusal is based on fraudulent claim and the planholder complied with documentary requirements (Section 26).
For contingent benefit plans, benefits are paid thirty (30) days after submission of all necessary documents (Section 26).
A planholder may sue in court to recover investment in case of insolvency or bankruptcy (Section 27).
If insolvency or bankruptcy is a cover-up for fraud or illegality, the planholder may sue directly against officers and/or controlling owners (Section 27).
In litigation enforcing any pre-need plan, the Commission determines whether claim payment was unreasonably denied or withheld; if found so, the pre-need company is liable for damages comprising actual damages, attorney’s fees and legal interest computed from the date the claim is made until fully satisfied (Section 28).
Failure to pay within the Section 26 time is prima facie evidence of unreasonable delay (Section 28).
A pre-need company may declare dividends only if the following remain unimpaired as certified under oath by the president and treasurer (and by the trust officer for item (c)):
- 100% of capital stock,
- an amount sufficient to pay all net losses and all liabilities for expenses and taxes,
- trust fund (Section 29).
Dividends declared must be reported to the Commission within thirty (30) days after declaration (Section 29).

Trust fund requirements and trustee investments

A trust fund per pre-need plan category must be established to ensure delivery of guaranteed benefits and services (Section 30).
A portion of installment payments collected must be deposited in the trust fund in an amount determined by the actuary based on the viability study approved by the Commission (Section 30).
Trust fund assets must remain at all times for the sole benefit of planholders and must not be used or diverted for any other purpose (Section 30).
No part of the trust fund may be used to satisfy claims of other creditors of the pre-need company; in insolvency, general creditors are not entitled to the trust fund (Section 30).
Despite any contrary law, trust fund benefits are exempt from all taxes and trust fund assets are not subject to attachment, garnishment, levy or seizure, except to pay:
- the debt of the planholder to the benefit plan, or
- debt arising from criminal liability imposed in a criminal action (Section 30).
Withdrawals from the trust fund are allowed only for payment of the cost of benefits/services, termination values, insurance premium payments for insurance-funded benefits of memorial life plans, and other costs necessary to ensure delivery of benefits/services, and only with Commission approval (Section 30).
The trust fund must at all times be sufficient to cover required pre-need reserve (Section 30).
Monthly trust fund deposits must be made in amounts determined by the accredited actuary and sufficient to pay promised benefits (Section 31).
For plans paid in full, the pre-need company must deposit at least 45% for life plans and 51% for education and pension plans, or a higher amount if determined by the actuary (Section 31).
For installment payments, minimum trust fund contribution limits are based on portions of contract price received:
- Life Plans:
  - Collection of first 20%: 5%
  - Collection of second 20%: 10%
  - Collection of third 20%: 70%
  - Collection of fourth 20%: 70%
  - Collection of fifth 20%: 70%
- Other Plans:
  - Collection of first 20%: 5%
  - Collection of second 20%: 10%
  - Collection of third 20%: 80%
  - Collection of fourth 20%: 80%
  - Collection of fifth 20%: 80% (Section 31).
Trust fund contributions do not form part of income or gross receipts and therefore are not available for dividend declaration or payment to creditors (Section 31).
Trust fund deposits must be made within twenty (20) days from end of each reference month for payments received, whether paid in full or installments (Section 31).
Failure to make trust fund deposits subjects the pre-need company to administrative liability under the Code (Section 31).
If the Commission discovers trust fund deficiency, it must notify the pre-need company and require additional deposits; the company has thirty (30) days from receipt of notice to correct the deficiency (Section 31).
Failure to pay the deficiency after notice subjects the company to payment of a penalty in addition to other sanctions (Section 31).
Plans sold prior to the Code’s effectivity follow minimum contributions rules and regulations in force at time of sale (Section 31).
Trust funds must be established separately for each type of pre-need plan with the trust department of a trust company, bank or investment house doing business in the Philippines (Section 32).
No trust fund may be established by a pre-need company with an affiliate trust entity subject to Section 38 (Section 32).
Trust agreements require Commission approval before execution and must include provisions on:
- operation of the trust fund,
- investment powers and types of investment,
- auditing/settlement of accounts,
- basis for termination,
- provisions for withdrawals,
- Commission examination/verification rights,
- trustee undertakings to abide by Commission trust fund rules,
- trustee undertakings to submit other prescribed data/information (Section 32).
Trustees must:
- administer/manage with utmost good faith, care and prudence,
- have exclusive management and control over funds and the right to sell/convert/invest/change/transfer/dispose within compliant parameters,
- not use trust funds to invest in or extend loans/credit accommodations to the pre-need company or related interests, except to entities that are direct providers of pre-need companies (Section 33).
Trust fund investments are limited to categories and subject to limits under Section 34 and to Commission-adjustable allocation limits (Section 34).
Fixed income instruments must include government securities, savings/time deposits/unit investment trust funds with duly authorized banks, commercial papers with required ratings, and direct loans secured by real estate mortgage within stated limits (Section 34).
Direct loans to corporations must be fully secured by a real estate mortgage up to 60% of zonal valuation; loans allocated for direct loans must not exceed 5% of the total trust fund; and each corporate borrower must not exceed 10% of the allocated amount; loan term must be no longer than 4 years (Section 34).
Direct loans to planholders are exempt from the corporate direct loan limitations, provided they do not exceed 10% of the total trust fund amount (Section 34).
Equities are limited to stocks listed on the main board of a local stock exchange; collective investment instruments (mutual funds) are allowed only if invested in fixed income instruments and blue chip securities under applicable limits (Section 34).
Equity investments may include financially stable actively traded companies with a good growth track record and declared dividends for the past three (3) years, and the trustee may invest in equities of companies related to the trustee if criteria are met (Section 34).
Equity allocation must not exceed 30% of the total trust fund, and any particular issue must not exceed 10% of the allocated amount; recording is at lower of cost or market (Section 34).
Existing investments not compliant must be disposed of within three (3) years from effectivity (Section 34).
Real estate investments must be in strategic areas of cities and first class municipalities; titles and transfer mechanics are governed by Section 34, including recording at acquisition cost, triennial appraisal, accounting treatment of increments/declines, and prohibition on using appraisal increment to cover monthly contributions (Section 34).
Real estate total recorded value must not exceed 10% of the total trust fund; excess existing real estate must be leveled off to the prescribed limit within three (3) years (Section 34).
Investments not in compliance require prior written Commission approval, and no single entity investment/deposit may exceed 15% of total trust fund value (Section 34).
The Commission may adjust percentage allocation per category upward or downward by not more than two (2) percentage points, and no more than once every five (5) years, with the first adjustment not earlier than five (5) years from effectivity (Section 34).
The pre-need company may not use the trust fund to extend any loan to or invest in its directors, stockholders, officers, or affiliates (Section 34).
Trustees must be approved by the Commission and, where required for protection of planholders, the pre-need company shall entrust trust fund management/administration to a reputable bank’s trust department, trust company or entity authorized to perform trust functions in the Philippines (Section 38).
No trust fund may be established with a subsidiary/affiliate/related trust entity except when:
- the Commission previously gives written approval, and
- public disclosure of affiliation is included in all materials in any form (Section 38).
The Commission may prescribe rules to ensure trust fund yield is maximized consistent with safety and liquidity (Section 38).
The trustee must at all times maintain a liquidity reserve sufficient to cover at least 15% of the trust fund but not less than 125% of the amount of availing plans for the succeeding year (Section 37).
The pre-need company must timely submit to the trustee a summary of benefits payable for the succeeding year (Section 37).
Liquidity reserve qualifying investments include specified secured loans, government guaranteed instruments, repurchase agreements using those instruments, and savings/time deposits with government-owned or commercial banks (Section 37).

Actuarial reports and disaccreditation

Documents submitted by a pre-need company to the Commission must be certified by an Insurance Commission accredited actuary, including:
- actuarial valuation of all liabilities under pre-need contracts,
- asset share studies for new products/enhancements/repricing,
- accounts in financial statements pertaining to actuarial reserve liabilities and other actuarial reserve items,
- financial projections with actuarial assumptions/bases,
- other reports required by the Commission (Section 39).
An actuary must immediately report to the Commission any matter in the reports requiring Commission intervention to protect planholders; the actuary is not liable to the pre-need company unless there is clear showing