[Insurance Tip]⑩ When You Need Quick Cash, Borrow Money Using Insurance Coverage

Loan Image

[Asia Economy Reporter Changhwan Lee] Park Jina (40), an office worker living in Seoul, has faced a significant shortage of living expenses since last year as her company struggled and her salary was delayed. To cover her living costs, Park is considering canceling a guaranteed insurance policy she had previously subscribed to. However, she is concerned that the surrender value would be less than the principal paid, and even if she tries to re-subscribe, she may not be able to get as favorable terms as before. Meanwhile, she learned that it is possible to secure funds without canceling the insurance by using insurance policy loans or partial withdrawals.

As COVID-19 and the prolonged economic downturn have made household finances difficult, more people are considering canceling long-term insurance policies to secure living expenses.

However, insurance experts advise consumers to be cautious because canceling insurance prematurely inevitably results in losses due to the nature of insurance products designed based on full premium payment. Premature cancellation may mean not even recovering the principal paid, and if one wants to re-subscribe later, the conditions may worsen.

It is rather recommended to use the subscribed insurance products, such as insurance policy loans (contract loans) or partial withdrawals, to secure urgent funds.

An insurance policy loan literally means borrowing money from the insurance company using the insurance contract as collateral. The insurance coverage remains intact while loans can be made within a certain range (50?95%) of the surrender value. This system is useful for financial consumers with low credit scores who face restrictions in using loans from first-tier financial institutions like banks or whose cash flow is unstable.

The interest rate on loans from savings-type insurance is generally 5?7%, which is not very high. However, the interest rate on loans from guaranteed insurance is usually above 7%, which is relatively high.

An official from the Life Insurance Association said, "Insurance policy loans have the advantage of being relatively easy to borrow without separate collateral," but added, "Since the principal and interest must be repaid, long-term use can be burdensome, so it is better to use it for short-term funds."

Samsung Fire & Marine Insurance's insurance policy loan service (Photo)

If long-term funds are needed, the partial withdrawal system is advantageous. Partial withdrawal allows policyholders to withdraw part of the accumulated reserves within a certain limit, depending on the insurance product. Unlike a loan, it is a concept of using part of the reserves accumulated from the premiums paid.

Some insurance products allow partial withdrawals, while others do not. Typically, savings-type insurance, variable annuities, and universal insurance products have partial withdrawal features.

However, the downside is that the reserves or coverage amount decreases by the amount withdrawn. Although there is no interest, the maturity refund or surrender value received later will be reduced.

An official from the Financial Supervisory Service stated, "When urgent funds are needed, it is necessary to first consider various methods such as insurance policy loans rather than canceling the insurance."