As the won-dollar exchange rate breaks past 1,470 won, more people are investing in financial products based on the dollar, such as stocks, bonds, deposits, and insurance. But experts advise against approaching dollar insurance with the idea of making foreign exchange gains.
Dollar insurance is characterized by paying premiums in dollars and receiving benefits in dollars. If you pay premiums in won, they are automatically exchanged into dollars and accumulated, and the reserves grow according to the interest rate. It is being promoted as a product for accumulating the safe asset, the dollar, over the long term.
When the dollar strengthens, the number of dollar insurance subscribers also tends to increase. From January to May this year, dollar insurance sold by the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH NongHyup Bank) totaled 513.5 billion won in premiums, nearly double the same period last year (269.3 billion won).
However, dollar insurance subscribers are dismayed that they have to pay more in premiums whenever the exchange rate rises. For example, in the case of subscribing to an annuity insurance policy that pays a dollar-denominated annuity from a certain point until death after paying $300 every month for 10 years, the monthly payment was 330,000 won when the exchange rate was 1,100 won per dollar, but 420,000 won when it was 1,400 won.
If the exchange rate rises when you receive the annuity compared with when you paid the premiums, you gain foreign exchange gains; if it falls, you incur foreign exchange losses. But insurance is a long-term product, and it is impossible to predict exchange rate trends over 10 to 20 years. Because canceling before maturity pays out less than the premiums paid, it is also difficult to cancel midway to capture foreign exchange gains.
Experts unanimously say to be cautious about signing up for dollar insurance when the exchange rate surges. The Financial Supervisory Service also issued a consumer alert in Feb. warning people to be careful about subscribing as dollar insurance gained popularity. Regarding foreign currency insurance, the Financial Supervisory Service warned, "Other than canceling the contract, there is no way to actively respond to exchange rate fluctuations," adding, "Be aware that the surrender value may be less than the principal paid in at the time of cancellation."