"Frequently Omitting Mandatory Explanations"...Many Life Insurance Companies Caught by FSC

Among 17 Surveyed Companies, 15 Rated 'Inadequate'
Proper Explanation of Surrender Refunds and Insurance Payments Not Provided

As a result of an investigation by financial authorities, it was found that many life insurance companies did not properly fulfill their duty to explain when selling whole life insurance. In particular, they failed to provide detailed explanations regarding surrender refunds and reasons for restrictions on insurance payments.

On the 26th, the Financial Supervisory Service (FSS) conducted a 'mystery shopping' investigation by posing as customers and discovered this situation, issuing a consumer alert regarding whole life insurance.

According to the FSS's investigation of whole life insurance sales by 17 life insurance companies, only two out of the 17 companies received an evaluation grade of 'average' in the fourth quarter of last year. The remaining 15 companies were all rated at the lowest grade, 'poor.'

Most life insurers showed the subscription proposal and only briefly explained the coverage details. They did not properly explain surrender and insurance payment issues, which are often the most sensitive for subscribers. Explanations about reasons for insurance payments and payment procedures were omitted, and in some cases, they failed to explain the duty of disclosure (such as hospitalization, surgery, or continuous treatment for more than 7 days within the last 5 years) and the fact that contracts would be canceled if the duty of disclosure was violated.

Explanations regarding surrender refunds were also insufficient. They compared premiums and expected surrender refunds between no/low surrender value products and standard products but partially omitted the fact that if no/low surrender value products are canceled early, the refund may be less or nonexistent compared to standard products, despite the lower premiums. Additionally, explanations about the cooling-off period, how to exercise it, and its effects were also found to be missing.

Unfair solicitation was also pointed out. Whole life insurance was presented as a savings product by explaining that it has a higher return than bank deposits. Furthermore, some companies did not provide the key product explanation document or failed to inform consumers about essential product features that must be explained.

As a result, complaints to the FSS have been increasing. The proportion of short-term payment whole life insurance (premium payment period of 10 years or less) among all whole life insurance rose sharply from 8.4% in 2019 to 41.9% in the first half of last year. The proportion of whole life insurance among incomplete sales complaints increased from 47.8% in 2021 to 55.2% in the second half of last year.

Accordingly, the FSS issued a consumer alert to inform consumers of important points to consider when subscribing. First, it emphasized that whole life insurance is not a savings insurance product. It also urged consumers to request sufficient explanations and confirm details before subscribing.

Consumers should also be cautious about specific products. Short-term payment whole life insurance has a short payment period and can reach a 100% surrender rate in a short time, but its premiums are higher than those of whole life insurance with the same coverage. The same applies to increasing whole life insurance. Since the death benefit increases, premiums are higher compared to whole life insurance with the same subscription amount. Early cancellation may result in greater losses.

Meanwhile, if death coverage is needed for a certain period, it is recommended to consider term insurance, which has a shorter coverage period but lower premiums, instead of whole life insurance that guarantees lifelong death coverage.

An FSS official stated, "We will require insurance companies rated 'insufficient' or below to establish self-improvement plans including employee training and self-inspections and will conduct follow-up inspections. For companies with particularly poor mystery shopping evaluation results, we plan to actively guide them to improve sales practices, including arranging meetings with CEOs."

Judicial Examination Results / Photo by Getty Images Bank

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