[Becoming an Insurance Insider] Variable Life Insurance Full of Controversies: "Just Know This"

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[Asia Economy Reporter Oh Hyung-gil] The variable insurance reserves, which once nearly evaporated by 10 trillion won due to the COVID-19 pandemic, have recently shown signs of recovery thanks to rising stock prices.

However, investors remain uneasy. Concerns over continued uncertainty in domestic and international stock markets have deepened the dilemma of whether to maintain or cancel variable insurance policies.

According to the life insurance industry on the 10th, variable insurance reserves, which had fallen to the 80 trillion won level after the COVID-19 outbreak, are now approaching the 100 trillion won mark. On January 20, when the first COVID-19 case was confirmed, variable insurance reserves stood at 105 trillion won, but since the first week of May, they have fluctuated around 98 trillion won.

The trend of variable insurance reserves is linked to the KOSPI index. When the KOSPI index fell to 1,900 points due to the COVID-19 crisis, the 100 trillion won barrier for variable insurance reserves was broken. On April 23, when the KOSPI index recovered to 1,900 points, variable insurance reserves surpassed 97 trillion won.

With reserves fluctuating significantly, it is not uncommon for people who purchased variable insurance to suffer losses and cancel their policies. This phenomenon arises from a lack of understanding of the product's structure.

Variable insurance is an indirect investment product where a portion of the premiums paid by the policyholder is invested in stocks or bonds, and investment performance is shared with the policyholder based on the results. The returns vary depending on investment performance. Like stock investments, profits and losses depend on the timing of buying and selling.

Also, since up to 20% of the premium is deducted for business expenses and risk insurance premiums before the remainder is invested, even if the fund's yield is good, canceling within 2-3 years can result in losing the principal. The insurance industry advises maintaining the contract for at least 7 years to recover at least the principal.

However, a significant number of variable insurance policyholders decide to cancel their contracts within 6-7 years after joining. As the rate of return declines over a long period and the possibility of recovering the principal disappears, they end up canceling reluctantly.

Most suffer unavoidable principal losses, leading to high consumer dissatisfaction. According to the Financial Supervisory Service, among 9,346 complaints related to life insurance sales last year, 29.3% were related to incomplete sales of variable insurance.

Insurance experts advise clearly defining the purpose of subscribing to variable insurance.

Variable insurance is broadly classified into savings-type, protection-type, and pension-type according to the subscription purpose. If the goal is to accumulate a lump sum, choose savings-type; for risk protection such as death, choose protection-type; and pension-type is suitable for retirement preparation.

Depending on the purpose, one should compare business expense ratios, fund management performance such as yields, and minimum guaranteed fee ratios by insurance company before subscribing. Also, it is necessary to directly check fund yields periodically and change funds if needed to manage returns.

On the other hand, if you absolutely want principal protection, it is advisable not to subscribe from the start. Also, those who are not confident in managing their policies should avoid subscribing to variable insurance.

An insurance industry official said, "If you have already subscribed, rather than hastily canceling due to low yields, you should aim for the effect of diversified investment by maintaining the policy for more than 10 years," adding, "In the case of savings-type variable insurance, maintaining it for over 10 years can also provide tax-exempt benefits, so choosing to maintain it is effective."

This content was produced with the assistance of AI translation services.