🚨 Recession-Type Loans, Insurance Policy Loans

Today Korean Economic News | 2025.01.06

📌 As Credit Dries Up, Turning to Secondary Financial Sector... 'Recession-Type Loans' Insurance Policy Loans Expected to Hit Record High

💬 As credit sources dry up, ordinary citizens are increasingly relying on insurance policy loans from the secondary financial sector, which is expected to push insurance policy loan volumes to an all-time high. As bank loan regulations tighten and access to funds becomes more difficult for those with lower credit ratings, insurance policy loans—with their relatively simplified screening process and lower interest rates—are emerging as an alternative. This trend is expected to continue for the time being as economic recession persists, leading to increased demand for subsistence funds.

1️⃣ Easy to Understand

These days, with the economy performing poorly, more people need money, but getting loans from banks is becoming increasingly difficult. In this situation, many people are turning to "insurance policy loans," borrowing money using their insurance policies.

For example, Mr. Kim's self-employed business sales had not recovered since COVID-19, leaving him short on living expenses. Although banks rejected his loan application due to his low credit score, he had been paying premiums on a whole life insurance policy for over 10 years and was able to borrow up to 90% of the surrender value. He could borrow 5 million won on the same day without a separate credit check, and the interest rate was in the 5% range, lower than a personal loan.

Insurance policy loans are considered "easy loans" because they can be borrowed within the surrender value range without a separate credit evaluation. However, the significant increase in these loans also signals that the ordinary citizens' economy is struggling. Experts call these "recession-type loans" and analyze that the recent surge in insurance policy loan volume is evidence that the economic recession is intensifying.

2️⃣ Economic Terms

📕 Insurance Policy Loan

An insurance policy loan is a loan that insurance policyholders can borrow from insurance companies within the limit of their surrender value.

• Because it uses the existing insurance policy as collateral, loans are possible without a separate credit evaluation, and in many cases, there is no fixed repayment deadline.
• However, interest accrues on the loan amount, and when insurance benefits are paid, the loan amount and interest are deducted.

📕 Secondary Financial Sector

The secondary financial sector refers to financial institutions other than the primary financial sector (banks).

• This includes savings banks, insurance companies, credit card companies, capital firms, and lending businesses.
• Generally, loan screening standards are somewhat relaxed compared to banks, but interest rates are relatively higher.

📕 Recession-Type Loans

Recession-type loans refer to loans that are inevitably used for living expenses or business maintenance during economic downturns.

• They are characterized as loans for subsistence or existing debt repayment rather than for consumption or investment.
• They tend to increase during economic recessions and can also cause an increase in household debt.

📕 Surrender Value

Surrender value is the amount returned to policyholders when they terminate their insurance policy early.

• It is the amount after deducting business expenses and risk insurance premiums from the paid premiums, and tends to increase the longer the payment period.
• Insurance policy loans are made within a certain percentage (usually 70-90%) of this surrender value.

3️⃣ Principles and Economic Outlook

💡 Causes of Increasing Insurance Policy Loans

• The recent surge in insurance policy loans is analyzed to have three main causes. First, as traditional loan channels are blocked due to tightened bank loan regulations, there is increased demand for alternatives. Second, more people need living funds due to increased household burdens from inflation and economic recession. Third, the characteristics of insurance policy loans—relatively low interest rates and simplified procedures—are emerging as attractive alternatives in the current situation.

💡 Current Market Situation and Outlook

• According to data from the Financial Supervisory Service, insurance policy loans increased by 15% in the first quarter of this year compared to the same period last year, and this growth trend is expected to continue. In particular, there is a notable influx of middle and low-credit borrowers who have been rejected from primary financial sector loan screenings, which raises concerns about deepening financial polarization. The financial sector already anticipates that the total amount of insurance policy loans will reach an all-time high.

💡 Positive Effects and Negative Risks

• The expansion of insurance policy loans has the positive aspect of providing a funding channel for the financially excluded in the short term. However, in the long term, there are risks such as increased household debt, weakening of the insurance's original protection function, and loss of insurance benefits if unable to repay the loan. Additionally, there is a possibility of becoming a "perpetual loan" where only interest is paid without repaying the principal, leading to strengthened monitoring by financial authorities.

4️⃣ In Conclusion

The surge in insurance policy loans is an indicator of the difficult reality of our economy. "Recession-type loans" are expanding due to economic recession and increased demand for subsistence funds, revealing the economic vulnerability of our society.

Financial consumers need to understand the characteristics and risks of these loans accurately rather than being deceived by the convenience of insurance policy loans. They should remember that if loan amounts are not repaid, insurance benefits will eventually decrease, making it difficult to achieve the original protection purpose.

Policy authorities should recognize that the increase in insurance policy loans is not simply a financial phenomenon but a signal of economic hardship, and should make policy efforts for fundamental economic recovery and support for vulnerable groups. At the same time, they should support consumers to make rational financial decisions by understanding the pros and cons of insurance policy loans through financial education.

Ultimately, we hope for an economic environment where the growth of insurance policy loans declines and consumers can enjoy the inherent functions of insurance to prepare for the future. This will require economic recovery, income growth, and the establishment of a sound financial ecosystem.