Starting in October, the 'death benefit securitization' system will be introduced. This will open a path for whole life insurance policies, which previously paid out to family members after the policyholder's death, to be received by the insured as a pension during their lifetime. However, it is important to carefully review the type of whole life insurance, the terms of enrollment, and the method of receiving the pension, as failing to do so could result in financial loss.

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The Financial Services Commission held a meeting in July and decided to implement death benefit securitization contracts starting in October with five life insurance companies (Samsung Life Insurance, Hanwha Life Insurance, Kyobo Life Insurance, Shinhan Life Insurance, and KB Life Insurance). Death benefit securitization is a system that allows up to 90% of the death benefit from a whole life insurance policy to be received as a monthly pension. If you have a whole life insurance policy with any of these five companies, it is recommended to check from October whether your policy is eligible for securitization. Insurance companies will also provide separate guidance to eligible policyholders.

Death benefit securitization is available from age 55 and above. As concerns have grown about income gaps between retirement and the start of pension payments-especially with the national pension eligibility age gradually increasing to 65-the eligible age for securitization has been lowered from 65 to 55. Policyholders with fixed-interest whole life insurance policies with death benefits up to 900 million won can apply regardless of income or assets. Both the contract period and the payment period must be at least 10 years. The policyholder and the insured must be the same person, and there must be no outstanding policy loans at the time of application.

Even whole life insurance policies purchased before the introduction of pension conversion riders can be securitized by adding a system-wide rider. However, variable whole life insurance, interest rate-linked whole life insurance, and short-term payment whole life insurance are excluded. Ultra-high death benefits exceeding 900 million won are also not eligible.

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There are two main types of death benefit securitization: 'monthly payment' and 'annual payment.' The annual payment type will be launched first in October, and the monthly payment type will be introduced sequentially after the completion of system development early next year. Policyholders who start with the annual payment type can later switch to the monthly payment type.

Policyholders can freely choose both the payout period and the securitization ratio. The securitization ratio can be set at any level up to 90%. The payout period can be set in yearly units (with a minimum of two years). Lump-sum payments are not allowed. The total amount of securitized payments must exceed 100% of the total premiums paid.

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For example, let’s assume an office worker, Mr. Kim, enrolled in a whole life insurance policy at age 30 (with a scheduled interest rate of 7.5%), paid a monthly premium of 87,000 won for 20 years, and is set to receive a death benefit of 100 million won. If Mr. Kim sets the securitization ratio at 70%, he will receive 140,000 won per month as a pension starting at age 55. The later the securitization begins, the higher the monthly payment: 180,000 won at age 65, 200,000 won at age 70, 220,000 won at age 75, and 240,000 won at age 80. In addition, the remaining 30% (30 million won) of the death benefit can still be received.

In the future, death benefits can be received not only in cash, but also in kind or as services. It is expected that this will be linked with services such as nursing care and healthcare. The activation of service-type insurance is a key policy task of the current administration, so a variety of new products are expected to be launched in the future.

When securitizing death benefits, it is essential to check whether you meet certain conditions, as failing to do so may result in a 15.4% interest income tax. Although whole life insurance is a protection-type policy, it becomes a savings-type policy upon securitization. Unlike protection-type policies, which are non-taxable, savings-type policies are subject to taxation on the difference (interest income) if the payout exceeds the total premiums paid upon maturity or cancellation.

There was debate over the taxability of death benefit securitization ahead of the enforcement of the amended Income Tax Act on July 1. To promote the system, the government decided not to tax these policies in the same way as existing savings-type insurance, provided certain conditions are met.

The government has set the standard at a monthly payment of 1.5 million won; amounts exceeding this are taxable, while amounts below are non-taxable.

However, the important point is that the insurance premium calculated after securitization is combined with the premiums of other savings-type insurance policies.

For example, if Ms. Park pays 200,000 won per month for a whole life insurance policy and securitizes 50%, the monthly premium for tax purposes is considered 100,000 won (premium paid x securitization ratio). If she also pays 1.3 million won per month for a savings-type insurance policy, the combined monthly payment (1.4 million won) is below 1.5 million won, so it is non-taxable. However, if Ms. Park pays 500,000 won per month for the whole life insurance policy, the combined monthly payment would be 1.55 million won, making it subject to taxation.