This blog post examines why insurance cannot be a financial investment by highlighting its core purpose as risk management, and exploring the structure of savings insurance and variable insurance, along with the pitfalls of fees and policy terms.
Insurance Is Not a Financial Investment
So what about insurance? As we all know, insurance is a cost paid to manage risk. This also means insurance is not a wealth management tool like savings or funds. Nevertheless, Koreans, who tend to be very reluctant to lose their ‘principal,’ clearly prefer savings insurance products that allow them to get back even a penny of the principal paid in later.
So, can these savings insurance products truly deliver substantial benefits to policyholders? Can it truly be an efficient insurance product that both safeguards the customer’s desired ‘principal’ and provides sufficient coverage when risks materialize?
Let’s revisit the case of variable insurance, which enjoyed significant popularity for a time, using dollar-based figures. Variable insurance is a product where a portion of the premiums paid by the policyholder is invested in stocks, bonds, etc., and the investment returns are distributed to the policyholder based on the performance of these investments. For example, assume a monthly premium payment of $200. From this amount, the risk premium is first deducted, then additional premiums like operating expenses and fees are subtracted. The remaining approximately 88–95% is separated as the savings premium and invested in funds. The investment results are then returned to the policyholder in the form of an annuity. In other words, only about $177.50 of the $200 monthly premium is actually used for investment. Assuming an annual return of approximately 3% based on this, the policyholder would receive about $230.75 after 10 years.
However, the findings from a comparison and analysis of 60 domestic variable annuity products by ‘K-Consumer Report’ in April 2012 were different. According to the survey, most products recorded effective rates of return that failed to even match the 3.19% inflation rate over the past decade. Following the release of these findings, the enrollment rate for variable annuity insurance plummeted by approximately 50-70%. While many people likely thought, ‘It’s a win-win—you get protection and investment returns,’ in reality, it was an investment product that couldn’t even keep pace with inflation.
Regarding this, Song Seung-yong, Director of Hope Financial Planning, states the following.
“If you think of insurance as savings and purchase protection-oriented insurance, you may incur significant financial losses, and the expected savings effect is also minimal. While insurance has the advantage of offering tax benefits if maintained long-term, terminating or withdrawing within 2-3 years can result in losses. You must contribute for at least 10 years to even begin discussing any savings effect.”
In short, insurance is not an investment product like mutual funds. Therefore, it is more rational to use insurance as a means to prepare for risks at minimal cost and manage the remaining funds through separate investment vehicles. For example, if you have $100 monthly to spend on insurance, it’s far better to allocate $30 to protection insurance and invest the remaining $70 in other ways rather than putting it all into savings insurance.
Insurance also has fees
One crucial factor to consider when purchasing insurance is excessive administrative costs and fees. For variable insurance, these costs are known to average around 10%. However, it’s easy to overlook that a significant portion of this is consumed by expenses like large insurance agencies’ equipment purchases or excessive advertising costs.
Generally, annuity insurance appears attractive because it provides coverage in case of accidents or illness, and if such events don’t occur, it can be converted into an annuity for later use. Because they combine both protection and savings functions, banks and financial institutions actively promote these products. The problem, however, is that premiums are expensive, and the operating expenses deducted by financial institutions during this process are also substantial. It is not uncommon for it to take at least 16 to 20 years or more just to recover the principal after deducting operating expenses from the premiums paid.
This means it’s difficult to receive more than the principal before 16 to 20 years have passed. Moreover, after 20 years, the value of the money is likely to have decreased. Ultimately, ‘paying premiums for 20 years just to barely recover the principal’ is hardly meaningful; calling it a loss isn’t an exaggeration.
Check the insurance policy terms
Consumers often rush to purchase insurance after seeing advertisements, thinking, “Was there such a good product?” The problem is that critical costs or unfavorable conditions are frequently glossed over without sufficient explanation during this process. Since insurance is generally a long-term product, even slight differences in fees and costs can lead to significant variations in the actual coverage amount received over time.
Particular caution is needed with insurance products marketed as “no questions asked.” Phrases like “enroll without a health check,” “enroll immediately without underwriting,” or “parental filial piety insurance” should not sway you easily. Claims of easy enrollment often imply hidden terms unfavorable to the consumer.
Regarding this, Song Seung-yong, Director of Hope Financial Planning, warns:
“Insurance products that are easy to enroll in often conceal multiple problems. This is because the coverage is often very limited, or the structure only allows insurance benefits in cases with an extremely low probability. When you see insurance ads on home shopping or cable channels, they talk as if coverage applies in all situations. Products commonly called ‘Lee Soon-jae insurance’ are like that. However, insurance fundamentally requires good health to enroll, and only then can you receive proper coverage. You must recognize that products heavily promoted as allowing enrollment even when ill or easily accessible to the elderly often have many hidden restrictions. For example, some have extremely limited coverage structures, such as providing no coverage for illness and only paying out if death occurs due to an accident.”
Attorney Jeon Young-jun of Hanuri Law Firm also points out the same issue.
“When selling insurance products, companies often explain it as if you can receive benefits even for minor issues. However, when an actual insurance incident occurs, it’s not uncommon for them to refuse payment by citing complex policy terms, saying ‘this isn’t covered’ or ‘that’s an exception.’ The part insurers fail to explain sufficiently is precisely these exception clauses. The policy terms contain highly complex exception provisions. For example, they may state, ‘We pay benefits if hospitalized for 3 days or more,’ but when you actually claim after a 3-day hospitalization, they often deny payment citing specific exception clauses.”
Therefore, when selecting an insurance product, you must carefully review the policy terms. If you have a medical history or special personal circumstances, you should fully explain these and go through a process to confirm in advance whether coverage is actually possible after enrollment. Even if it’s difficult to read and understand all the complex terms and conditions filled with fine print, this step should not be skipped. It’s crucial to remember that it’s not uncommon for the advertised coverage to differ from the policy terms, or for clauses unfavorable to the policyholder to be written in excessively small print, making them easy for consumers to overlook.
Remember one thing before purchasing insurance
So how should you choose a good insurance policy? The fundamental principle is ‘getting the maximum coverage for the minimum cost’. Of course, no single product perfectly satisfies both this criterion and individual needs. The crucial thing is to meticulously assess whether the insurance precisely aligns with your specific purpose.
Insurance products can be broadly categorized into ‘fixed-amount coverage products’ and ‘actual-cost coverage products’. Fixed-amount coverage products allow for duplicate compensation, while actual-cost coverage products compensate proportionally to the actual loss incurred. Let’s explain this a bit more simply.
For example, if you have three $100,000 cancer insurance policies (fixed-amount coverage) and are diagnosed with cancer, you can receive $100,000 from each policy, totaling $300,000. Conversely, indemnity-based products only compensate for actual losses incurred. Therefore, even if you have multiple policies, the compensation amount is divided proportionally to the actual loss. Consequently, the maximum amount you can receive is capped at $100,000.
Summarizing this, the conclusion is relatively straightforward. Whether it’s a life insurance company product or a property and casualty insurance company product, there isn’t a significant difference. The first thing to check is whether the insurance is a fixed-amount coverage product or an actual loss coverage product. And since actual loss coverage products do not provide duplicate compensation, purchasing just one is sufficient. Simply remembering these basic principles can significantly reduce unnecessary losses when choosing insurance.
