Preventing Minors' 'Debt Inheritance'... Spotlight on Credit Insurance

Repayment of Debt with Insurance Money in Case of Borrower Accident
Exception for 'Improper Solicitation Acts', Financial Consumer Protection Act Amendment Proposed

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] The story of a 27-month-old child facing the inheritance of a 1 billion KRW debt after the sudden passing of their father has brought renewed attention to the issue of ‘debt inheritance’ among minors.

The government has begun preparing measures including legal support. However, ‘credit insurance,’ which could resolve debt inheritance in the private sector insurance market, is still being overlooked. Recently, interest has grown as a bill was proposed to exclude products that protect financial consumers from being subject to unfair solicitation acts, potentially revitalizing credit insurance.

According to the insurance industry on the 10th, credit insurance is a product where, if a borrower cannot repay their debt due to an insured event such as death or injury, the insurance company pays the agreed insurance amount to settle the debt on their behalf.

Borrowers can reduce their remaining debt with insurance payouts in the event of an insured incident, preventing the inheritance of debt and contributing to stable household financial management. Notably, since there is no subrogation claim against the insured or their survivors, families and assets can be protected without passing on debt.

In countries like the United States, Japan, and the United Kingdom, it is common to subscribe to credit insurance when taking out loans to protect oneself and family. However, in Korea, credit insurance remains little known among consumers due to concerns over ‘tying sales’ practices, where credit insurance is sold as a loan condition.

In Korea, the only providers of credit insurance are the foreign companies Cardiff Life Insurance and Cardiff Non-Life Insurance. However, the premium income for credit life insurance remains minimal, with 600 million KRW in 2019 and 400 million KRW in 2020.

Sales regulations are a hindrance. During the 20th National Assembly, a bill to exempt credit insurance from regulatory restrictions under the Insurance Business Act was proposed but not discussed.

On the 8th, Rep. Yoon Kwan-seok of the Democratic Party proposed an amendment to the Financial Consumer Protection Act aimed at preventing harm from debt inheritance, presenting a new opportunity.

The current Financial Consumer Protection Act prohibits ‘tying sales’ of certain financial investment products with loan contracts, but the amendment proposes to exclude solicitation of protection-type products that are directly related to loan products and have financial consumer protection effects from being classified as unfair solicitation acts.

Rep. Yoon pointed out, "According to Supreme Court statistics, from 2016 to March this year, there have been 80 cases of minors filing for personal bankruptcy due to parental debt inheritance," emphasizing that "the phenomenon of debt inheritance is emerging as a serious social problem."

Meanwhile, the government has taken steps to address debt inheritance among minors. Following President Moon Jae-in’s directive last October to "seek institutional improvements to protect minors from debt inheritance," the Ministry of Justice and others have decided to establish a legal support system to resolve the debt inheritance issue.

[Image source=Yonhap News]

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