Park Han-sol reports on Korea's financial regulators, along with fintech and insurance. She previously wrote about the art world, from biennales and exhibitions to fairs and auctions, with a focus on Seoul and the figures shaping the scene. Before joining The Korea Times, she spent a year at ABC News' Seoul bureau, contributing to coverage of major Asia-Pacific events.
Borrowers turn to insurance loans as mortgage lending tightens
A loan counter at a commercial bank in Seoul, June 24 / Yonhap
By Park Han-sol
A dental lab assistant surnamed Choi in Seongnam, Gyeonggi Province, has turned to insurance policy loans several times whenever she needed a little extra cash to cover unexpected expenses.
“Taking out a regular loan affects my credit score directly. But with an insurance policy loan, I’m borrowing against premiums I’ve already paid, so it doesn’t drag down my credit rating,” she said. “The interest rate is also lower than what you would get from other nonbank lenders. So when I need a small amount of money quickly, this feels like the most reasonable option I have.”
Choi said she stayed away from borrowing money to invest in stocks during this year’s record-breaking market rally. But she has definitely seen people around her use insurance policy loans to bet on the stock market.
Similar conversations have surfaced on Blind, a popular anonymous workplace community app in Korea.
“I got the money quickly from an existing insurance policy, and my interest rate is only 3.6 percent. I’ll make some gains and pay it back soon,” read one post shared in the app’s stock investment section in late June by an employee at an auto parts company.
Insurance policy loans have traditionally been a secondary source of credit compared with mortgages, which have long been the preferred way for households to borrow larger sums. But that balance has started to shift as banks and insurers tighten mortgage lending to comply with government efforts to rein in household debt.
Over the past year, the gap between local insurers’ outstanding policy loans and their mortgage lending has narrowed sharply.
Across the country’s eight leading life and non-life insurers — Kyobo Life, Samsung Life, Hanwha Life, Samsung Fire & Marine Insurance, Hyundai Marine & Fire Insurance, KB Insurance, DB Insurance and Meritz Fire & Marine Insurance — outstanding policy loans stood at 47.69 trillion won ($33.16 billion) at the end of June.
That was only 346.2 billion won below their mortgage loan balances, compared with a 2.89 trillion won gap a year earlier.
Unlike bank or credit card loans, policy loans are generally less affected by government lending restrictions because they are backed by the policyholders’ own accumulated insurance value.
The surge in the benchmark KOSPI earlier this year has added to demand, with some retail investors using these loans to raise money for stock investments.
Insurance companies have taken steps to slow the increase, including lowering the maximum borrowing limit from 95 percent to 85 percent of a policy’s surrender value in April. The measures, however, have done little to reverse the trend.
Regulators are now keeping a close eye on the rise. At a household debt review meeting on July 9, the Financial Services Commission warned that lending from nonbank financial institutions was becoming more volatile and called for stronger oversight.
Borrowers also face risks if they fail to repay. Insurers can deduct outstanding policy loans from final insurance payouts, and if the loan balance exceeds the policy’s surrender value, the policy itself can be terminated.