Rate Cuts Spark Interest: Navigating the Pros and Cons of Variable Insurance
Variable Insurance Gains Attention with High Returns Amid Falling Deposit Interest Rates
As the possibility of a base rate cut in the second half of the year increases, deposit interest rates are also falling sharply. The deposit interest rate at commercial banks has dropped to the mid-2% range (1-year maturity). The savings bank deposit interest rate, which was close to 4% at the beginning of this year, has also fallen to the 3.6% range. As the atmosphere that the high interest rate period is coming to an end spreads, products that guarantee high returns and high interest rates are attracting attention. Variable insurance sold by life insurance companies is one of them.
What is Variable Insurance?
Variable insurance is a product in which the insurance company invests the remaining amount of insurance premiums received after deducting business expenses and risk insurance premiums in a fund that suits the policyholder’s investment tendencies and distributes the resulting profits based on performance. Depending on the product design, variable insurance is divided into variable whole life insurance (coverage) for disease and death, variable annuity insurance (savings) for old age, and variable universal insurance (coverage + savings) with free payment or mid-term withdrawal functions.
Increasing Popularity of Variable Insurance
The number of variable insurance subscribers has been increasing this year. The number of new contracts fell from 10,013 in December 2022 to 5,811 in December 2023, but recovered to 10,055 in June. The premium for new variable insurance contracts fell from 4.7 billion won in 2022 to 3.5 billion won in December 2023, but increased to 7.9 billion won in June this year.
High Annual Yield of Variable Insurance
The reason variable insurance is attracting attention is because of its annual yield of nearly 7%. According to the Life Insurance Association’s disclosure, the yield of variable insurance funds for the past year for 20 domestic life insurance companies as of the end of the second quarter of this year was 6.89%. iM Life Insurance was the highest at 11.75%. It was followed by MetLife Life Insurance (10.23%), Fubon Hyundai Life Insurance (10.16%), Heungkuk Life Insurance (10.12%), AIA Life Insurance (9.63%), Mirae Asset Life Insurance (9.51%), Samsung Life Insurance (9.10%), Hanwha Life Insurance (8.60%), KDB Life Insurance (8.15%), Kyobo Life Insurance (7.81%), and ABL Life Insurance (7.65%).
Minimum Guaranteed Variable Insurance Products
Life insurance companies have gone a step further and introduced minimum guaranteed variable insurance products. This product guarantees an annuity amount set in advance by the insurance company regardless of the variable annuity insurance rate of return. IBK Annuity Insurance guarantees an annual simple interest rate of 8%, iM Life guarantees an annual simple interest rate of 7%, and KDB Life guarantees an annual simple interest rate of 6%.
Things to Consider When Signing Up for Variable Insurance
Variable insurance has variable insurance benefits and surrender refunds depending on the performance of the investment. This means that if the investment performance is not good, the principal may be lost. Accordingly, the financial authorities included variable insurance in the target of the ‘Guidelines for Calculating Risk Ratings for Investment Products’ early this year. A life insurance company official explained, “If you cancel within a short period of time, the cancellation refund may be less than the insurance premium paid,” and “If you want to guarantee the principal, signing up for a savings or time deposit may be a better option.”
Importance of Long-Term Holding and Fund Management
Variable insurance is more likely to be profitable if it is held for a long period of at least 10 years. Savings variable insurance can also benefit from tax exemption on capital gains if held for 10 years or more. The insurance industry explains that if you need money right away, you should be careful about signing up for variable insurance. It should also be remembered that variable insurance investments are made according to the ‘principle of self-responsibility’. After signing up for variable insurance, the policyholder must make investment decisions such as selecting a fund. The insurance company is responsible for managing the fund selected by the policyholder. It does not separately manage the policyholder’s return.