[Practical Finance] Low Interest Rates and Stock Market Boom... How About Investing in Variable Insurance?

Variable Insurance, Partial Premium Investment in Stock and Bond Funds
Insurance Benefits and Surrender Refunds Vary Based on Performance
Stock Price Increase Highlights Financial Planning

Global Asset Diversification Reduces Risk
Midterm Fund Performance Review Essential
Rebalance with Expert or AI Recommendations
Maximize Returns with 15-20 Year Long-Term Investment

[Image source=EPA Yonhap News]

[Asia Economy Reporter Ki Ha-young] Thanks to ultra-low interest rates and a booming stock market, interest in the variable insurance market is growing. According to the Life Insurance Association, the initial premiums for variable insurance from January to October last year totaled 2.4078 trillion KRW, an increase of 59.7% (900.4 billion KRW) compared to the previous year. If this trend continues, there are optimistic forecasts that the annual total will surpass 3 trillion KRW for the first time ever.

Variable insurance is a performance-linked insurance product where a portion of the premium is invested in funds such as stocks and bonds, and the insurance payout and surrender value fluctuate based on investment performance. If investment results are good, the insurance payout and surrender value increase, but in the opposite case, the surrender value may fall below the principal. It is sensitive to the stock market, so interest rises during periods of low interest rates and rising stock prices.

In the first quarter of last year, due to the impact of the novel coronavirus disease (COVID-19), stock prices plummeted, leading to an increase in variable insurance cancellations and non-payments. However, after March, as stock prices rose and idle market funds flowed into the stock market, new subscribers to variable insurance also surged. Initial premiums rapidly increased from 595.5 billion KRW in the first quarter to 1.0854 trillion KRW in the second quarter and 2.0939 trillion KRW in the third quarter on a cumulative basis last year.

Mirae Asset Life Insurance Holds 1st Place in Variable Insurance Market Share at 52.5%

Until October last year, the life insurance company that sold the most variable insurance was Mirae Asset Life Insurance. Mirae Asset Life Insurance recorded initial premiums of 1.2635 trillion KRW, capturing a market share of 52.5%. This means that more than half of the customers who newly subscribed to variable insurance last year chose Mirae Asset Life Insurance products. Prudential Life Insurance (8.7%), MetLife Life Insurance (7.5%), and BNP Paribas Cardif Life Insurance (5.7%) followed behind.

Despite the impact of COVID-19, Mirae Asset Life Insurance maintained profitability based on its global asset management competitiveness. Mirae Asset Life Insurance invests more than 60% of its variable insurance assets in overseas assets, pursuing global diversification. This figure overwhelmingly exceeds the industry average overseas investment ratio, which remains in the 10% range.

Mirae Asset Life Insurance’s flagship product is the 'MVP Fund.' It is the industry's first discretionary asset allocation fund, where asset management experts thoroughly monitor the global financial markets quarterly on behalf of customers and actively conduct asset rebalancing to respond accordingly. In particular, the MVP60 Fund, which is composed of a portfolio of 13 funds including domestic stocks, bonds, overseas stocks, overseas bonds, and alternative assets, has achieved a cumulative return exceeding 50%. Due to its consistent performance, it is regarded as the optimal financial management tool in the ultra-low interest rate era.

[Image source=Yonhap News]

Variable Insurance Is a Long-Term Investment Product, Consider Over 10 Years

Experts advise that to maximize profits through variable insurance, long-term investment of 15 to 20 years is necessary. Typically, insurance companies deduct 10-15% of the customer's premium as business expenses and invest the remaining amount in variable insurance funds. The period during which business expenses are deducted is about 7 to 10 years. Additionally, fund management fees of 0.3-0.5% are charged proportionally to the reserve funds. Because of this, if long-term investment is difficult, it is explained that mid-term investment of about 7 to 10 years is needed to hedge the volatility of returns over time.

When investing in long-term products, avoiding catastrophic losses is as important as returns. One of the most effective ways to reduce investment risk is diversification. By diversifying investments between stocks and bonds and also globally, one can pursue medium risk and medium returns even if not the highest returns. To this end, it is advised to check whether the variable insurance you want to subscribe to has a diverse lineup of overseas funds that allow for diversified investment. Also, it is necessary to confirm whether a certain scale of funds is actually being managed in overseas funds within the variable insurance. If global funds are included but almost no assets are actually managed, investment efficiency decreases, making it difficult to achieve the effect of diversification.

Above all, 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 the savings type; if the purpose is risk protection such as death, choose the protection type; and the pension type is suitable for retirement preparation. Depending on the purpose, compare business expense ratios by insurance company, fund management performance such as returns, and minimum guaranteed fee ratios before subscribing to a product. Also, directly check fund returns periodically and manage returns by changing funds if necessary. On the other hand, if principal protection is absolutely required, it is advisable not to subscribe from the start.

Fund Management: Delegate to Experts or Use AI Recommendations

Variable insurance requires checking funds periodically and changing funds when necessary. Since it is difficult for customers to manage this individually, the insurance industry has recently introduced various related services and strategies.

Mirae Asset Life Insurance conducts asset rebalancing quarterly through the discretionary asset allocation MVP Fund, where asset management experts thoroughly monitor the global financial markets. They review market conditions and fund performance quarterly and provide fund allocation proposals by disclosing operational strategies and model portfolios based on future investment outlooks.

Samsung Life Insurance has been offering an artificial intelligence (AI) fund recommendation service on its website and mobile application since November last year. Collaborating with robo-advisor asset management company Fount, it analyzes global macroeconomic outlooks and expected returns by asset class to recommend individual funds and fund weightings to variable insurance subscribers once a month.

Heungkuk Life Insurance and MetLife Life Insurance have also introduced AI fund management services for variable insurance. MetLife Life Insurance allows all fund management tasks?from checking fund status to recommending and changing fund portfolios based on investment preferences and rebalancing?to be handled via KakaoTalk.