Insurance Loan Restrictions Heighten Risk for Vulnerable Citizens to Seek Out Predatory Lenders
Insurance companies have tightened the reins on loans secured by policy contracts, making it significantly harder for individuals with poor credit or facing financial distress to access funds. With financial authorities now including insurance loans in their oversight, those unable to navigate regulated institutions like banks will experience greater difficulty in securing emergency cash.
Major insurers including Samsung Life, Kyobo Life, and Shinhan Life lowered the maximum loan limit against surrender values by 10 percentage points starting March 7. Insurance contract loans allow policyholders to borrow up to 95% of their policy's surrender value. Financial authorities have issued official directives to insurers, urging a conservative adjustment of loan limits, and are closely monitoring the recent rapid surge in demand for these loans.
As of the end of March, the outstanding balance for insurance contract loans at major life and non-life insurance companies reached 55.46 trillion won, an increase of 520.1 billion won from the end of last year. Loans extended by insurers to households also rose by 600 billion won in a single month, absorbing demand from borrowers who found it difficult to secure loans from primary financial institutions.
If financial authorities' regulations extend to second-tier financial institutions, low-credit individuals risk being excluded from the formal financial system. Insurance contract loans have served as an emergency funding channel for borrowers unable to access bank loans, as they allow for swift fund acquisition without a separate credit assessment. A narrower lending limit means individuals urgently needing funds for living expenses or debt repayment will have to seek alternative avenues. Last year, when second-tier financial institution credit loans contracted, the number of reports filed with the Financial Supervisory Service regarding damages from illegal private lending reached 17,538, a 13-year high.
The elderly population aged 60 and over, facing a sharp decline in income, could be significantly impacted by this situation. Thirty-two-point-six percent of insurance loan users are over 60, qualifying them as vulnerable borrowers. As the threshold for bank loans rose, vulnerable older borrowers increasingly sought to secure funds for living expenses or business by increasing loans against their insurance policies from insurers, which offer relatively lower interest rates.
Kim Dae-jong, a professor of business administration at Sejong University, pointed out that following the reduction in the legal maximum interest rate in the past, a significant number of low-credit individuals were driven into illegal private lending as loan approval rates from legitimate loan businesses decreased. Professor Kim added that loan regulations at an appropriate level should not lead to another 'balloon effect.'