Outstanding policy loans at South Korea's life insurers have topped 42 trillion won ($30.3 billion) as banks tighten lending, pushing borrowers toward quick cash secured against their insurance surrender values. The balance rose for a third straight month, driven first by leveraged stock investing in the first half of the year and more recently by owner-occupier buyers scrambling to cover home purchase payments, even as regulators and insurers moved to rein in the loans by cutting borrowing limits.
The combined policy loan balance at five major life insurers — Samsung, Hanwha, Kyobo, Shinhan and NH — stood at 42.3726 trillion won at the end of July, up 466.5 billion won from a month earlier, according to financial industry data on the 11th. That marks an increase of 2.3573 trillion won over six months from 40.0153 trillion won at the end of January.
A policy loan lets a customer borrow against the surrender value of an insurance policy. It is used mainly at life insurers, which carry many long-term and savings-type policies that build up large surrender values. Unlike a regular credit loan, it requires no separate proof of income or credit review and allows borrowing within the surrender value, and it is exempt from debt-service-ratio (DSR) rules. With no early-repayment fee, it functions much like a negative-balance checking account — a quick-cash channel that borrowers can draw on when needed and repay once they have spare funds.
Analysts point to demand for investment funds amid a booming stock market as the main driver of this year's rise in policy loans. Because the money can be raised without a separate credit review, demand grew for using it as investment capital during the market's climb, according to the analysis. As the pace of increase steepened, major life insurers moved to manage it in April, lowering the borrowing limit on some products to 85% of surrender value from 95%. The balance fell once in April as a result, but then rose for three straight months — to 41.2279 trillion won at the end of May, 41.9060 trillion won at the end of June and 42.3726 trillion won at the end of July.
More recently, banks' tightening of household lending has also contributed to the rise in policy loans. Since last month, commercial banks have successively cut limits on mortgages and credit loans, leaving borrowers unable to cover home purchase payments and other needs with existing loans alone and pushing them to seek other funding sources. Industry officials say demand to raise urgently needed funds for living expenses and the like is also considerable.
Even as policy loans keep growing, cutting limits indiscriminately is not easy. The loans are frequently used for genuine needs such as living expenses and housing funds, and excessive restrictions could prompt customers who need quick cash to cancel their insurance policies outright. That could lead to consumer harm, including the loss of existing coverage. "If limits are restricted too much, there is a risk that customers will cancel their insurance," an industry official said. "We are managing the growth through methods such as reducing the number of products eligible for loans."
