Insurance policy returns cause a stirKim Ji-yeon dialed her insurance company in a panic after she read a consumer report recently saying that the average profit rate of insurance policies with variable annuities was below the nation’s inflation rate.
Kim has been investing 300,000 won ($263) a month in a variable annuity insurance policy for the last six years. Her insurance agent told her that she had paid a total of 20.7 million won into her account, but that the total now stood at just less than 20 million won.
“The insurance company told me the return rate for the policy was 6 percent, but this doesn’t make any sense [given the size of my account],” she said.
Now call centers like these are being flooded with calls as subscribers ask if there is any way they can cancel their policy without losing their investment.
“We receive 500 calls on average every day,” said Lee Seung-cheol, assistant director of Samsung Life Insurance’s communications team, adding that this did not include the number of requests received by branch offices and insurance agents.
However, the Korea Life Insurance Association, which represents major insurance companies, says the claims being made by the Korea Finance Consumer Federation (KLIA) about the low profits are misleading. This is because variable annuity insurance policies are long-term investments with profit rates that change over time, it argues.
Such policies allow holders to allocate a portion of their insurance payments to various types of investments within a portfolio, including stocks, bonds and equity funds. After 10 years, the holder is no longer taxed on their investment.
Spurred by Korea’s stagnant real estate market and the low interest rate on housing deposits, investors flocked to such policies in recent years, rising from 1.82 million in 2008 to 2.47 million in 2010.
Additionally, only six of 60 variable annuities have seen a return rate above the average yearly inflation rate of 3.19 percent over the last decade. Kyobo Life Insurance had the highest rate of 4.06 percent.
The Korea Life Insurance Association stresses that the KFCF’s calculation is only one method of many and cannot be considered an absolute standard. The weakness in the method is that it does not take into account the fact that the latest data has been managed for less than a month, it says.
The KLIA argues that the return rate for the same investment option should be 6.64 percent.
The association also officially requested last week that the Financial Service Commission take down its report and fine the KFCF for violating the law by providing partial information on insurance products.
“If anyone [.?.?.] cancels their policy because of the KFCF’s report, it should assume full legal responsibility [for the loss],” the association said in a release.
“The purpose of reports like these is not to encourage consumers to cancel their existing contracts, but to point out prevailing problems in the financial industry,” said Jo of the KFCF.
Complaints regarding variable annuities have been on the rise for several years now, with 2,418 cases reported in 2010, up from 1,175 cases in 2006.
“The industry should provide consumers with basic information that they deserve to know,” said Jo.
Park Eun-joon, an analyst at Shinyoung Securities, urged caution among subscribers who may be considering pulling the plug on their policy.
“Variable annuities are for people who aim to save for decades and get their money back in the form of a regular pension later in life,” Park said. “This product has only been around for a decade, so it’s still too soon for us to discuss if this investment will turn out to be profitable or not.”
To minimize the possible loss, however, consumers should regularly check on their investment products, experts said.
“It is consumers’ job to choose insurance products that suit their needs and keep an eye on the performance of the products they buy,” said Jung Se-chang, a professor at Seoul’s Hongik University.
By Lee Sun-min, Kim Hye-mi [firstname.lastname@example.org]
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