A system to securitize death benefits—allowing people to receive in advance, during their lifetime, the death benefits otherwise payable only upon death and use them as retirement funds—began on the 30th of last month. However, it turned out that most policyholders can receive only around an average of 100,000 won per month as retirement funds through securitization. Critics say it merely offered insurers a chance to resolve early their headache products, fixed-rate high-interest whole life policies.
According to the financial authorities on the 3rd, contracts eligible for death benefit securitization are fixed-rate whole life insurance policies. While there are various products that pay benefits when a policyholder dies, only whole life insurance is eligible for securitization. To apply, the applicant must be at least 55 years old, the policyholder and the insured must be the same person, and premium payments must be completed. In addition, the contract term and premium payment period must both be at least 10 years, and there must be no outstanding loan balance on the policy. Contracts that meet all conditions number 414,000, with total death benefits (face amounts) of 2.31 trillion won.
The financial authorities said up to 90% of the death benefit can be securitized for at least two years. However, the actual source of retirement funds is the surrender value received upon canceling the contract. Even if the death benefit is 100 million won, the surrender value may be only 34 million won. Because the surrender value increases every year, the later one applies for securitization, the larger the source (surrender value) becomes, resulting in more retirement funds.
If one applies for securitization and receives monthly retirement funds, the death benefit and the surrender value decrease by a certain ratio. This means the more retirement funds one receives, the less the death benefit payable at death becomes. For example, if 80% of a 100 million won death benefit is securitized, the death benefit declines each year, leaving only 20 million won (20%) in the end. The remaining death benefit is paid when the policyholder dies. Conversely, if the policyholder dies before receiving all the retirement funds, the remaining death benefit is paid.
The financial authorities gave an example of a 40-year-old woman who enrolled in a product with a 100 million won death benefit and a scheduled interest rate of 7.5%, paid 18.72 million won in premiums over 10 years, and applied to receive retirement funds over 20 years with a securitization ratio of 90%.
If she applies for securitization at age 55, she can receive an annual average of 1.53 million won (a monthly average of 127,000 won) for 20 years, totaling 30.6 million won. Because the securitization ratio is set at 90%, if she dies after receiving all retirement funds, an additional 10 million won (10%) in death benefit is paid.
The problem is that even when combining the retirement funds and the death benefit, the total is only 40 million won. This falls far short of the 100 million won death benefit the insurer would have to pay. Because it is essentially pulling future benefits into the present, one must accept a loss. An official at the financial authorities said, "Because it uses (future benefits) as present value, it can't be helped," adding, "The biggest significance is that it gives policyholders a choice."
The situation is the same even if the securitization application is delayed. If one applies at age 75, the most favorable condition, they receive 3.04 million won annually (253,000 won per month) for 20 years, totaling 60.9 million won, and an additional 10 million won upon death. The total received is 70 million won, still short of 100 million won.
Although the financial authorities used a 100 million won death benefit as an example, another issue is that among the 414,000 eligible contracts, few policyholders have face amounts of 100 million won or more. The largest share among eligible policies is "50 million won death benefit" contracts. While the financial authorities promoted that one can receive an average of 120,000–250,000 won per month, in reality most eligible people receive only about half that.
If one simply halves the premium payments and death benefit in the financial authorities' example and calculates, applying for securitization at age 55 yields an average of 60,000 won per month. Even for those applying at age 75, who receive the most retirement funds, the average is about 130,000 won per month. Even if one forgoes the benefit that would be paid to surviving family upon death, it does not provide much help with living expenses.
There is also criticism that the financial authorities merely did insurers a favor. Most contracts eligible for securitization are fixed-rate products with high interest of 5%–7% signed 20–30 years ago. The longer insurers maintain these contracts, the heavier the burden; securitization can reduce that risk.
An official at the financial authorities said, "It is a system designed to allow the use of whole life insurance in an aging era, so it is for consumers," adding, "Insurers also have incentive structures, so we think it is a 'win-win' result for both insurers and consumers."