FSS Revises 'Executive Term Insurance'... Policyholders Limited to Corporations

Main Culprit of Mis-selling Executives' Regular Insurance Product Revision
Insurance Period Should Reflect Executives' Possible Working Duration
Retention Bonus Prohibited... Refund Rate Limited to Within 100%

Despite warnings from financial authorities, the aggressive marketing of executive term insurance, which often sold out quickly, will be restructured.

According to the "Improvement Plan for Executive Term Insurance Product Structure" announced by the Financial Supervisory Service on the 24th, insurance companies must now reasonably set the insurance period by considering the executive's possible working period. Previously, it was common to unreasonably assume the executive's age up to 110 years, but going forward, it will be limited to around 90 years. The policyholder will be restricted to corporations to prevent incomplete sales caused by individuals or sole proprietors subscribing. Additionally, the design of maintenance bonuses will be prohibited, and the increase in insurance benefits will be set at a reasonable level reflecting the rise in the executive's human value after 10 years. For single-premium payments where the payment period and coverage period are the same, the refund rate will be capped at 100% to prevent misunderstandings as savings-type insurance.

Executive term insurance is a protection-type insurance that small and medium-sized enterprises subscribe to with their executives, such as CEOs, as insured persons to prepare for contingencies like the absence of management. The main coverage includes death benefits, payments in case of severe disability, and coverage for diagnosis of specific diseases.

However, recently, insurance companies have aggressively marketed these products emphasizing high refund rates and tax-saving effects rather than the original purpose of insurance, causing controversies over incomplete sales. Although there are differences among insurers, the subscription limit for executive term insurance ranges from a minimum of 500 million KRW to a maximum of 8 billion KRW. This structure allows agents to earn commissions in the hundreds of millions of KRW. Furthermore, executive term insurance is advantageous for securing the insurance contract margin (CSM), a key profit indicator for insurers under the new International Financial Reporting Standards (IFRS 17), leading to extensive marketing campaigns by insurers.

Recently, unhealthy sales practices were detected when corporate insurance agencies (GA) recruited executive term insurance policies. For corporations, if tax law requirements are met, the paid premiums can be recognized as expenses (deductible), providing tax benefits. However, GA-affiliated agents sold products to individuals or sole proprietors unrelated to tax savings by promoting tax benefits or sold high-value contracts under the pretext of corporate conversion or inheritance for sole proprietors. Some GAs even induced insurance contract signings by promising large commissions if small business owners registered their children as GA agents and subscribed to insurance.

A Financial Supervisory Service official urged, "Insurance companies must thoroughly review advertisements and recruitment training materials for existing insurance products that will be discontinued to strengthen internal controls and prevent unhealthy sales practices such as sell-out marketing."