[Death benefit liquidity scheme marks one year] ②
Converting policies from survivors' benefit to personal retirement income
Scheme fills income gap for those aged 55–64 before pension eligibility
Contract rate of 0.65% signals sluggish uptake
Calls grow to lower eligibility bar and diversify products
Lee Mi-young, 79, a pseudonym, had long relied on policy loans whenever money ran short. Though finances were tight, she wanted to keep the fully paid-up insurance policy she had held for years. But borrowing on an ad hoc basis left her cash flow unstable. Needing a steady income stream, she applied for the death benefit liquidity scheme as soon as it launched. Under the arrangement, she repaid all outstanding policy loans and then began receiving 90 percent of her death benefit spread over five years. Her first-year payout came to about 11 million won ($8,200) — roughly 920,000 won a month. Starting with the next disbursement, she plans to switch to a monthly payment format to better align with her regular medical bills. Her policy, taken out in July 2001 with a face value of 100 million won, carries a guaranteed interest rate of 6.5 percent. She has paid 49.5 million won in premiums to date, and the surrender value stands at 61.79 million won.
As the death benefit liquidity scheme marks its first anniversary, whole-life insurance has opened up as a new source of retirement income. Retirement income has traditionally rested on a "three-pillar pension" — the national pension, occupational pension and personal pension. The death benefit liquidity scheme effectively adds a fourth pillar on top. That is why analysts say the policy can help cushion the so-called income crevasse — the period after leaving a primary job but before public pension payments begin, when income drops sharply or disappears altogether. However, uptake has been low, and experts are calling for a broader product lineup and stronger public outreach.
A fourth pillar to bridge the gap before pension payments begin
The fourth pillar is most needed in the years before national pension payments begin. Statistics from five major life insurers, obtained through People Power Party lawmaker Park Sung-hoon's office, show that 49.2 percent of applicants over the scheme's first year — 3,257 cases in total — were between 55 and 64 years old. That group drew down an average of 89.5 percent of their death benefit, close to the 90 percent ceiling, and spread payments over an average of 7.9 years.
At that pace, payouts for applicants in the 55–64 age bracket would wrap up roughly between ages 63 and 72. The national pension becomes available at 63 to 65, depending on birth year. The pattern suggests many are using the scheme to plug the income crevasse — the gap between retirement and the start of pension payments.
For older policyholders like Lee, the scheme supplements insufficient living expenses or medical costs. However, applicants aged 75 and older accounted for just 4.7 percent of cases — 153 in total.
Payouts are also modest. Across the five insurers, first-year disbursements per case ranged from about 4.2 million to 4.7 million won annually, or roughly 350,000 to 390,000 won a month. That is because payments are calculated on the surrender value rather than the face value of the death benefit. Lee receives more than twice the average partly because her policy — taken out long ago at a high guaranteed rate — carries a large surrender value, and partly because she chose a short five-year payout period.
0.65% uptake rate — eligibility, products and outreach all need work
By raw numbers, the scheme's performance is underwhelming. As of the end of September, only 0.65 percent of the 467,206 eligible contracts across the five insurers had actually proceeded to liquidity conversion. Some observers caution, however, that it is too early to judge the scheme's success by volume alone, arguing that the significance lies in having added one more tool for building retirement income. A Financial Services Commission official said that while the monthly amounts themselves are not large, the scheme matters because it gives people a range of institutional options to access funds they need during their lifetime to prepare for retirement.
Even so, the scheme has considerable ground to cover before it can truly function as a fourth pillar. The eligibility bar remains high. To apply, a policy must meet all of the following conditions: a fixed-rate whole-life policy with a death benefit of no more than 900 million won; a contract and premium-payment period each of at least 10 years with premiums fully paid; the policyholder and the insured must be the same person; and no outstanding policy loan balance. Variable, interest-linked and short-payment-period whole-life policies, as well as critical illness advance-payment products, are excluded entirely.
Another limitation is that eligibility is in effect confined to holders of older whole-life policies. Many whole-life products sold in recent years include features that allow partial conversion or withdrawal of accumulated funds as an annuity, but those payouts are classified as surrenders for accounting purposes, making them ineligible for liquidity conversion.
Product diversification is also a pressing need. When a monthly payment option was added this year to the annual payment format available at launch, roughly half of applicants — 50.8 percent as of September — chose the monthly format, showing that demand follows choice. By contrast, service-based products covering nursing care and long-term care, which were being developed alongside the scheme, have yet to have a launch date set. A Financial Services Commission official said the agency is continuing to work with the industry on how to structure service-based products covering nursing and long-term care, but added that no specific launch date has been determined.
Experts also say the way the scheme is communicated needs to change. Applications spiked briefly right after launch in November last year, with 909 cases, and again in April this year when the monthly payment option was introduced, with 427 cases, before cooling off each time. In the intervening months, an average of 3,104 newly eligible contracts were added each month — policies whose premiums had been fully paid or whose holders had turned 55. The argument is that outreach should go beyond simply informing people the scheme exists and show them concretely how much they could receive. One insurance industry official acknowledged that eligible policyholders are notified about the scheme on a regular basis, but said payment simulations are not included with those notifications.
Kang Sung-ho, head of the insurance industry research division at the Korea Insurance Research Institute, said the scheme is meaningful because it unlocks a lump sum that was previously tied up and lets people use it where they need it — a shift from insurance that was once for survivors to insurance that now serves the policyholder. He called for stronger promotion and further diversification of the scheme in line with its original purpose of securing retirement income.
won@heraldcorp.com
