'Exchange Rate Fluctuations' Foreign Currency Insurance Products Warning... Financial Supervisory Service Issues Consumer Alert Level 1

Level 1 of 3 Stages: Caution, Warning, Danger
"Not for Savings, but Whole Life Insurance" Scams Also Occur

On the 25th, the Financial Supervisory Service (FSS) announced that it has issued a Level 1 'Caution' consumer alert for foreign currency insurance. The consumer alert is divided into three levels: caution, warning, and danger, with this being Level 1. Foreign currency insurance products involve both premium payments and payouts in foreign currencies (for example, US dollars), and the risk increases as exchange rate volatility rises.

Yeouido Financial Supervisory Service Headquarters, Yeongdeungpo-gu, Seoul. Provided by the Financial Supervisory Service

The FSS explained that sales of foreign currency insurance are surging due to expectations of exchange gains from rising exchange rates (weakening of the Korean won) and high overseas market interest rates. There is also growing concern that consumers may subscribe without fully understanding the product. The risk is significant as premiums and insurance payouts can fluctuate widely depending on the exchange rate at the time of conversion to Korean won.

They also disclosed a recent complaint case where a consumer, thinking foreign currency insurance was a savings product to accumulate tuition fees for their child, found out it was actually a foreign currency whole life insurance policy. Along with this, four points of caution were conveyed to consumers.

First, foreign currency insurance is not a product intended for 'exchange rate tech' (hwan-tech) purposes. Unlike regular savings or financial investment products, the entire premium paid is not invested. Another issue is that there is no proper countermeasure other than contract cancellation when exchange rates fluctuate. Upon cancellation, the refund amount may be less than the principal paid.

They noted that premiums may increase or insurance payouts may decrease depending on exchange rate fluctuations. If the exchange rate rises during the insurance period, the insured’s premium burden increases. If the exchange rate falls at the time of payout, the won value of the refund may decrease.

For example, if a foreign currency insurance policy with monthly payments over 10 years is purchased at an exchange rate of 1,450 KRW/USD, but the exchange rate falls to 1,200 KRW/USD at maturity, the maturity refund rate becomes 100%. This is 21 percentage points lower than the 121% maturity refund rate of a similarly structured won-denominated insurance policy.

Insurance payouts and refunds may also change depending on overseas interest rate fluctuations. Interest rate-linked foreign currency insurance products set the credited interest rate (disclosed interest rate) considering overseas bond interest rates. For interest rate-linked products, the credited interest rate on the policyholder’s accumulated amount changes according to the insurer’s asset management returns and market interest rates. If overseas market interest rates fall, the surrender refund or maturity insurance payout may be lower than expected.

Attention should be paid as transaction costs such as currency exchange fees may occur during premium payments and insurance payout processes.

The FSS advised that if consumers subscribe without fully understanding the product details, they can use the withdrawal system. Insurance policyholders can withdraw their subscription within 15 days from the date they receive the insurance policy document and within 30 days from the subscription date without any special reason. They may also receive a refund of the premiums paid.