[Practical Finance] Investment + Risk Protection + Tax Savings 'All-in-One with Variable Insurance'

Tips for Retirement Preparation in an Aging Society, Variable Insurance
Popular During Stock Market Booms with Returns Exceeding Bank Interest
Asset Management Option Function to Prepare for Stock Market Downturns

[Asia Economy Reporter Changhwan Lee] #. Mr. A, a man in his early 40s living in Seoul, has recently become increasingly interested in insurance products. As he has aged, he felt that saving or real estate alone was insufficient for retirement preparation. Turning 40 brought more health issues and concerns about maintaining his health, which further increased his interest in insurance. Therefore, Mr. A is looking for financial products that can simultaneously address retirement preparation and provide financial returns exceeding bank interest rates.

With the aging society, individual interest in retirement preparation has grown, and variable insurance, which allows investment, risk protection, and tax savings simultaneously, is gaining attention. Variable insurance is a product where the premiums paid by the policyholder are invested in stocks, bonds, etc., and the profits generated from the investment performance are distributed to the policyholder to pursue excess returns.

As domestic and international stock markets improved in 2020 and 2021, the returns on variable insurance increased, leading to a rise in sales performance of variable insurance by life insurance companies. According to the Life Insurance Association, the initial premiums for variable insurance by domestic life insurers surged from KRW 1.8163 trillion in 2019 to KRW 3.1044 trillion in 2020, and KRW 5.0155 trillion by November 2021.

The initial premium refers to the first premium paid by the policyholder and is a key indicator of the growth potential of an insurance product. Last year marked the first time that the annual initial premium for variable insurance exceeded KRW 5 trillion.

However, since only the amount remaining after deducting risk premiums and business expenses (commissions) is invested in variable insurance, long-term subscription is essential to realize profits. Early cancellation may result in principal loss. Premiums are also relatively more expensive compared to other whole life insurance products, so it is necessary to carefully examine past stock market conditions and the insurer’s management performance.

Three Main Types of Variable Insurance

Variable insurance is broadly divided into variable whole life insurance, variable annuity insurance, and variable universal insurance. Variable insurance shares similarities with bank savings/deposits or securities company stocks and funds but has unique characteristics exclusive to life insurance. In particular, guaranteed-type variable insurance like variable whole life insurance features a minimum death benefit guarantee option that ensures the basic death benefit (insured amount) regardless of how poor the investment returns are.

Variable annuity insurance, a savings-type insurance, pays benefits in the form of annuities upon long-term subscription, enabling securing retirement living funds. For variable annuity insurance, if maintained for more than 10 years and premiums paid for over 5 years (monthly payments of KRW 1.5 million or less in installment savings), interest income can be tax-exempt, making it advantageous as a tax-saving product.

Variable universal insurance offers a flexible deposit and withdrawal function, allowing flexible adjustment of insurance benefits. Even before the insurance matures, it can be freely used for marriage funds, education funds, retirement funds, and more.

Can Variable Insurance Be an Alternative During Stock Market Downturns?

Recently, as domestic and international stock markets have declined, concerns about variable insurance returns have also arisen. This is because variable insurance, which invests in stocks or bonds, is closely related to stock market conditions.

In response, insurers have incorporated an ‘asset management option’ function into variable insurance, enabling subscribers to defend against declining returns through fund changes, setting fund allocation ratios, automatic fund rebalancing, and average premium installment investment functions.

The fund change function allows the policyholder to change all or part of the accumulated funds to another special account’s fund upon request. Changes can be made up to the annual fund change limit set for each product through the insurer’s website, call center, customer plaza, or mobile app.

The fund allocation ratio setting function enables the policyholder to diversify the invested premiums across different funds. This is done by selecting the allocation ratio for each fund on the application form.

Policyholders can apply to change the invested funds and allocation ratios selected at the time of insurance subscription, allowing risk diversification and efficient asset management by utilizing the fund change function according to future financial market trends.

The automatic fund rebalancing function periodically (every 3 months, 6 months, 1 year, etc.) redistributes the accumulated fund ratios according to the customer’s set ratio based on investment performance. This function addresses the instability caused by returns being heavily influenced by market trends such as stock prices at that time.

A Life Insurance Association official said, "Variable insurance is a financial product that must be maintained long-term, so unlike installment funds, it is difficult to redeem due to temporary declines in returns. Therefore, various options have been created to defend against declining returns."

Changes in Variable Insurance Including AI Management and Healthcare Services

Variable insurance is also providing various services in line with the changing times. Major insurers reflect the expanded non-face-to-face consumption trend due to COVID-19 by enabling easy and convenient subscription to variable insurance through online channels.

Some products allow subscription with a small amount as low as KRW 10,000 per month, and link variable insurance business expenses to investment returns, so if there are no investment returns, the business expenses for that month are not deducted.

To support policyholders’ return management, insurers offer various fund management options beyond simple stock-type, bond-type, and mixed-type fund selections, including stop-loss options, automatic mid-term withdrawals, discretionary expert asset allocation funds, and AI fund management tailored to customer investment preferences.

Reflecting the recent increased consumer interest in health management, some products also provide healthcare services. These products support health and wellness programs to encourage policyholders’ health management efforts and lifestyle improvements, professional medical consultations, large hospital reservations and specialist guidance, customized health checkup planning, and overseas medical services.