The era of 'living with illness' is approaching, where living a long life becomes more of a misfortune than a blessing. Pensions that can be received consistently in retirement without income have become increasingly important. The financial authorities are also keeping this in mind and plan to launch a Korean-style tontine and low-surrender pension insurance early next year. While many of the terms are unfamiliar, the concept is simple. It means they will introduce a product that provides more pensions than currently available pension insurance. The financial authorities expect that the Korean-style tontine pension will pay out 38% more pension than standard pension insurance.
The economic situation has not improved, and the future is uncertain, so how can they promise to give more pensions decades from now? Specifically, it's not the insurance company but other subscribers who increase my pension. The tontine pension operates on the concept that when a customer cancels their contract or dies, all or part of the premiums they have paid up to that point are contributed to the pensions of other customers.
According to the financial authorities, if a subscriber dies or cancels the contract before receiving their pension, they will only receive 70% of the accumulated amount. For instance, if Person A subscribes to pension insurance and cancels the contract or dies before turning 65 (the pension starting age), they could receive 1 million won, but under the Korean-style tontine pension, they would only be refunded 700,000 won. The remaining 300,000 won becomes part of the contributions for subscribers B, C, and D of the Korean-style tontine pension. People like B do not have to pay extra premiums but still receive an increased pension. Conversely, A must bear a more significant loss by canceling the contract. It resembles a 'zero-sum game' where the more one person loses, the more benefit others gain.
If no one cancels their contract, the insurance company that sold the product will incur a loss. However, such situations rarely occur. The retention rate of life insurance contracts after six years, first disclosed in 2023, was 40%. This means that among those who subscribe to life insurance, 6 out of 10 cancel their contracts after six years. Although the cancellation rate of savings-type insurance, like pension insurance, is lower, the six-year retention rate of IBK Pension Insurance, which mainly sells savings-type insurance, is also around 52%.
There is an interesting fact. While distributing information on the Korean-style tontine pension, the financial authorities only addressed the situation before the 'start of pension' (age 65). There has been no explanation regarding what happens if a person dies shortly after reaching 65 and receiving their pension for just one year.
Currently available pension insurance returns any remaining pension to the beneficiaries in the case of early death. Products with conditions like '10-year guarantee' are typical. It means that if one dies within ten years after the pension starts, the unpaid pension will return to the family, providing some reassurance. In contrast, traditional tontine pensions pay the remaining pension not to family members but to the pensions of other contract holders. If someone else dies, my pension amount increases.
The financial authorities plan to discuss how to handle the remaining pension in the event of early death after the start of pension. Ultimately, it is highly likely that they will decide to return the remaining pension to the family, just as it is now. This consideration arises from the reluctance to give the premiums they worked hard to pay for life to a complete stranger.
Under these conditions, the Korean-style tontine pension will only be a product that increases the pension amount if death or contract cancellation occurs before the pension starts. Furthermore, the financial authorities have established standards indicating that if a subscriber dies, they must return more than the premiums paid, considering consumer sentiment. Ultimately, the effect of the pension increase of 38% in the Korean-style tontine pension due to subscriber death is only 2%.
As a result, there are claims about whether the Korean-style tontine pension can actually be called a tontine pension. The traditional tontine pension is based on the premise of subscriber death, while the Korean-style tontine pension emphasizes contract cancellation rather than death. It is no different from a low-surrender product that pays a lower refund upon early cancellation, with the Korean-style tontine pension being similar to a low-surrender life annuity that has already been sold since 2022.
A representative from the financial authorities noted, 'There were arguments for introducing overseas tontine pensions, but there are aspects that do not align with domestic sentiment.' They explained, 'Domestic consumers understand that they should receive at least the premiums paid back upon death, so the Korean-style tontine pension incorporates this sentiment.'