"Apply Regardless of Income or Assets"... How to Avoid a Tax Bomb When Receiving Monthly Death Benefits from Age 55 [Practical Finance]

Receive Up to 90% of Death Benefits in Advance as a Pension
System Launches in October with Five Major Life Insurers
Future Options Include Payment in Goods or Services, Not Just Cash

Starting in October, the "death benefit securitization" system will be introduced. This will allow whole life insurance, which previously paid out to family members after the policyholder's death, to be received as a pension while the policyholder is still alive. However, it is important to carefully review the type of whole life insurance, subscription conditions, and pension payment methods, as failing to do so may result in financial loss.

Receiving Death Benefits as a Pension Before Death

The Financial Services Commission held a meeting in July and decided to implement death benefit securitization contracts starting in October with five life insurance companies: Samsung, Hanwha, Kyobo, Shinhan, and KB. Death benefit securitization is a system that allows up to 90% of the death benefit from a whole life insurance policy to be received monthly as a pension. If you have a whole life insurance policy with any of these five companies, it is advisable to check from October whether it is eligible for securitization. Insurance companies will also provide separate notifications to eligible policyholders.

Death benefit securitization is available from age 55 and above. As the national pension eligibility age is gradually being raised to 65, concerns have grown about income gaps between retirement and the start of pension payments. Thus, the eligible age for securitization has been lowered from 65 to 55. Policyholders with fixed-interest whole life insurance contracts with death benefits of 900 million won or less can apply without any income or asset requirements. Both the contract period and the premium payment period must be at least 10 years. The policyholder and the insured must be the same person, and there must be no outstanding policy loans at the time of application.

Even whole life insurance policies purchased before the introduction of the pension conversion rider can now be securitized by adding a system-wide rider. However, variable whole life insurance, interest-linked whole life insurance, and short-term payment whole life insurance are excluded. Ultra-high death benefits exceeding 900 million won are also not eligible.

If You Pay 87,000 Won Monthly for 20 Years, You Can Receive 140,000 Won Monthly at Age 55

There are two main types of death benefit securitization: "monthly payment type" and "annual payment type." The annual payment type will be launched first in October, and the monthly payment type will be introduced sequentially once system development is completed early next year. Policyholders who start with the annual payment type can later switch to the monthly payment type.

Policyholders can freely choose the payment period and securitization ratio. The securitization ratio can be set freely up to 90%. The payment period can be set in yearly units (minimum of two years). Lump-sum payments are not allowed. The total amount paid out through securitization must exceed 100% of the total premiums paid.

For example, suppose an office worker named Kim enrolled in a whole life insurance policy (with a planned interest rate of 7.5%) at age 30, paid a monthly premium of 87,000 won for 20 years, and is entitled to a death benefit of 100 million won. If Kim sets the securitization ratio at 70%, he will receive 140,000 won per month as a pension starting at age 55. The later the securitization begins, the higher the monthly payment: 180,000 won at age 65, 200,000 won at age 70, 220,000 won at age 75, and 240,000 won at age 80. In addition, the remaining 30% (30 million won) of the death benefit can still be received.

In the future, death benefits may be received not only in cash but also in the form of goods or services. It is expected that these will be linked to services such as nursing care, caregiving, and healthcare. The promotion of service-type insurance is a key policy of the current administration, so a variety of new products are likely to be introduced going forward.

Check Whether Interest Income Tax Applies

When proceeding with death benefit securitization, it is essential to check whether you are subject to the 15.4% interest income tax if you do not meet certain conditions. Although whole life insurance is a protection-type insurance, it is considered savings-type insurance when securitized. Unlike protection-type insurance, which is tax-exempt, savings-type insurance is taxed on the difference (interest income) if the payout exceeds the premiums paid at maturity or upon cancellation.

As of July 1, with the enforcement of the "Partial Amendment to the Enforcement Decree of the Income Tax Act," whether death benefit securitization would be taxed became a key issue. To promote the system, the government decided not to tax it in the same way as other savings-type insurance if certain conditions are met.

The standard set by the government is a "monthly premium payment of 1.5 million won." If the amount exceeds this, it is taxable; if it does not, it is tax-exempt. Importantly, after securitization, the calculated premium is combined with premiums from other savings-type insurance policies.

For example, if a policyholder named Park pays 200,000 won per month for whole life insurance and securitizes 50%, the monthly premium is considered to be 100,000 won (premium paid x securitization ratio). If Park is also paying 1.3 million won per month for other savings-type insurance, the combined monthly premium (1.4 million won) is below the 1.5 million won threshold, so it is tax-exempt. However, if Park pays 500,000 won per month for whole life insurance, the combined monthly premium would be 1.55 million won, making it taxable.