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Fianacial Planning Cases
Protection of Family
The development of modern science and industry extended the human life span but increased the possibility of disaster as well. Today, in Korea, car accidents leave approximately 950 people dead and injured per day, and industrial accidents, approximately 210 people dead and injured daily. Even more shocking is the fact that the rate of deaths due to diseases among people in their 40s is thrice that of people in their 30s. Any family dealing with the death or injury of their loved ones due to accidents and diseases naturally experience unimaginable grief, but what pains them more is the economic difficulty following the loss of the family head. To avoid this extreme situation, you need to assess your financial status and prepare preventive measures.
What is the best method of guaranteeing your family’s future?
To guarantee your family’s future in case something happens to you, subscription to an insurance product can be a secure means based on a proper plan instead of the usual savings. In such case, consider the following:
1. Increase your investment and savings and secure your cash liquidity.
Long-term investment and long-term savings are indispensable for your economic stability. If you want to invest, determine how much risk you can take and select a long-term investment of more than 5 years. You would also do well to prepare an easily encashable asset for emergency aside from the general investment of long-term savings. Most professionals recommend maintaining an amount that lets you control the family’s living expenses for 3 months or 6 months with an easily encashable asset.
2. Determine the guaranteed amount of insurance.
When using insurance to prepare against an accident, too big or too small amount is not good. First of all, you need to check the amount you need. As funds in preparation for early death, the amount covers funeral expenses, debt redemption fund, children’s education fund, and bereaved family’s living expenses. If you have difficulty calculating the insurance guarantee amount, consult with a professional financial planner.
3. Subscribe to an appropriate insurance.
After determining your required insurance guarantee amount, subscribe to an appropriate insurance. The earlier you subscribe to it, the better. The insurance company may reject your subscription considering your age and health status; on the other hand, early subscription can mean low insurance cost.
What kinds of insurance products are available?
Insurance is divided into products for savings and those for guarantee depending on the purpose.
1. Life insurance.
Life insurance includes straight life insurance, term insurance, variable life insurance, and universal life insurance. Straight life insurance enables a lifetime guarantee wherein the death benefit is paid regardless of when the subscriber dies and has a savings function. In contrast, term insurance guarantees the payment of death benefit for a specific period only. With regard to the guarantee period, short periods such as 1 year and long periods such as 30~40 years are possible. Its premium is lower than that of straight life insurance, but the guarantee period is limited. Renewal term insurance offers the right to renew the contract even though the subscriber’s health condition is not good once the insurance period ends. Combining straight life insurance and term insurance is necessary depending on your financial status; ditto for determining the necessary fund per period. Variable life insurance invests the insurance money in stock or bond to pay for the death benefit based on the investment result. Therefore, if the investment condition is good, you can utilize such benefit. Currently, Korea’s variable life insurance guarantees a minimum death benefit even if the actual investment results are not good. Variable life insurance features the free payment system of insurance premium, enabling the adjustment of a death benefit; it is also a highly flexible product. Every year, a year-end report is given to the policyholder to let him/her know how the insurance reserve is fluctuating. In other words, it is a highly transparent product. If you want to know more about the insurance products available, refer to the announcement on the comparison of insurance products of Korea Life Insurance Association ( or General Insurance Association of Korea ( or each insurance company’s public announcement.
2. Health insurance.
The health insurance guarantees risks associated with diseases. Note, however, that most health insurance products do not guarantee all diseases. Instead, only diseases that can cause the most serious damage are optionally guaranteed. These diseases include cancer, cardiac disorder, blood vessel disorder in the brain <brain aneurysm?>, liver disorder, hypertension, diabetes, chronic respiratory disorder, and gastric & duodenal ulcer. Only 3, 9, or 15 diseases can be guaranteed depending on the product. Diseases are also guaranteed by dividing them into those affecting men and those affecting women. Recently, a health insurance product covering serious diseases (CI insurance) has been introduced, enabling the reduction of the medical fee after paying 50% of the death benefit in advance in case of serious diseases or those requiring major surgery.
3. Accident insurance.
The medical fee, insurance money for disorder following an accident, and death benefit are paid in case the subscriber figures in an unpredictable extraneous accident. Accident insurance includes general accident insurance, which compensates for all expenses related to a general accident, traffic accident insurance, which guarantees only injuries related to a traffic accident, group accident insurance, which guarantees accidents related to group activities, and travel accident insurance, which compensates for accidents occurring during a travel. Accident insurance is especially useful to a person who is constantly exposed to specific risks for professional and environmental reasons.
4. Long-term nursing insurance.
This type of insurance pays for the nursing fee when a subscriber can no longer lead a normal daily life following a disease or an injury or due to aging. With the aged population increasing recently, medical expenses have increased by 10 times for the past 10 years from 162.1 billion won in 1990 to 1.58 trillion won in 2000. In foreign countries, medical expenses are directly covered; thus securing a lifetime guarantee. Currently, however, the long-term nursing insurance sold in Korea does not provide for medical service, paying only for the nursing fee. There are also many cases wherein the guarantee period is limited as a fixed period (e.g., until one is 80 years old); hence the need for confirmation when subscribing to this product.
5. Income compensation insurance.
Income compensation insurance provides regular payment in case a subscriber no longer has a source of income due to injury or diseases. The payment is related indirectly and directly to the income of the insured. In foreign countries, this insurance is in place; in Korea, however, such is still in the introductory stages. With the job instability becoming more pronounced, this insurance product becomes more useful. The table below describes the various risks we encounter in our lifetime and the corresponding major insurance products available to the individual.
Straight life insurance
Term insurance
Life insurance for investment
Risk of dying early
Pension insurance Risk related to post-retirement
living expenses
Health insurance
Accident insurance
Medical expense insurance
Long-term nursing insurance
Risk of figuring in accidents or
contracting diseases
Income compensation insurance Risk of unemployment
Fire insurance for house Risk related to real estate
Overall insurance
Fire insurance for movable property
Risk related to movable property
Car accident insurance Risk of accidents involving a car
Facilities’ owner & manager’s
reparation liability insurance
Risk of reparation liability
involving an asset
Doctor’s / Officer’s
reparation liability insurance
Risk of reparation liability by
Daily life
reparation liability insurance
Risk of general reparation liability
Why do I have to review the insurance product that I have already subscribed to?
It’s because your financial status changes frequently. The life insurance, fire insurance, and income compensation insurance you have subscribed to in the past may not satisfy your present needs. You may have more income, more real estate, or more movable property or have kids and consequently increase your liabilities. On the other hand, check whether you have subscribed to too many insurance products. If you are old, and your children have already graduated from the university, you may not need as many insurance policies as in the past.
Is there a checklist prior to subscribing to insurance?
Try to find a risk-avoiding or risk-reducing method. For example, refraining from smoking and reducing your alcohol intake will reduce the risk of early death and diseases. Installing a fire extinguisher may prevent a disaster due to fire. These methods can reduce your burden of premium payment. Above all, the insurance should be utilized to prevent a serious risk or a major risk that may occur in your family and asset.
How can I decide the guaranteed amount when subscribing to life insurance?
You may think that the higher the insurance money is, the better. Note, however, that the payment of the insurance premium may be burdensome. When deciding the guaranteed amount of life insurance, you should consider the following:
How much are your income and expenses?
How much insurance premium can you undertake?
Do you want your bereaved family to maintain the same standard of living even after your death?
Does your spouse work in a company?
Do you have children? What are their ages?
Do you have investment assets, savings, and other assets that will help secure your bereaved family’s future, in case something happens to you?
How much support would you get from Social Security?
How much are the outstanding issues of the mortgage, loan for school expenses, allotment, etc.?
Is preparing a spare inheritance tax necessary?
How can I decide the period of life insurance?
Term insurance and straight life insurance can be selected separately according to the individual’s needs and age. If you have spare money, you can satisfy your death guarantee needs and savings needs; at the same time, utilizing straight life insurance and term insurance’s special contract (average, decrease, increase) is recommendable. The term insurance is appropriate for temporary death guarantee needs. Generally, term insurance whose guarantee period is less than 10 years is appropriate for short-term needs. In the case of the USA market, if the age of the insured is more than 15 years, i.e., a long-term need, straight life insurance is recommendable. Similarly, in case of more than 45 years, straight life insurance is appropriate.
What is the advantage of term insurance?
If you are still young, you can undertake the increased guarantee amount at the time of your marriage or birth of your children after purchasing higher guarantee money than the one you presently need with less money through term insurance. At this time, even if your health deteriorates, or you develop a disorder following an accident, you can maintain the increased guarantee amount required. If you are unable to pay the premium, you can subscribe to the necessary guarantee amount only; later, if your financial status improves, you can extend the guarantee period or reserve through a renewal clause and a conversion privilege.
What is the difference between straight life insurance and term insurance?
Through term insurance, you can get a death guarantee with the lowest premium. Still, that does not mean paying the low premium all throughout the guarantee period. For term insurance, the premium is increased through renewal. Thus, after a certain age, the premium may be more expensive than subscribing to straight life insurance. Moreover, through term insurance, you cannot enjoy the savings effect applicable in delaying tax payment as in straight life insurance. As the insured ages, the premium’s level increases as well. Thus, when you are old with high possibility of death, you cannot enjoy a reasonable effect. Nonetheless, the same premium is applied to straight life insurance following subscription regardless of age. Moreover, term insurance does not offer a refund in case the contract is canceled in the middle of the term or at maturity; in contrast, you can get a refund through straight life insurance.
What are the characteristics of income compensation insurance?
Receiving income compensation from Social Security is difficult as in the case of employment insurance; the payment amount is also insufficient. Income compensation insurance can compensate for the lost income during the remaining economic activities in case of medical treatment or unemployment. Therefore, employees faced with a situation wherein the concept of lifetime job is no longer applicable and the fear of unemployment grows are advised to subscribe to this type of insurance. In the case of self-employed people, they have the advantage of getting a damage guarantee at a closing period when sales are difficult due to fire, explosion, car accident, etc. Note, however, that this insurance product has been introduced only recently in Korea; it is mostly bundled with special contracts such as health insurance or accident insurance. A certain portion of the insurance’s subscription amount is paid regardless of the subscriber’s income. As such, there are some cases wherein the insurance money is not enough to compensate for the income loss. Recently, income compensation insurance started to be sold separately by some insurance companies. The income guarantee amount also increases by a certain rate every year considering the inflation rate. At this time, the premium varies by profession. Even though the same guarantee is provided, production workers with high risk need to pay high premiums; in contrast, office workers with low risk pay a low premium.
How can I handle the tax of life insurance money?
Depending on the person selected among the insurance policyholder (person who concluded the contract with an insurance company; he/she has the duty of paying the premium), the insured (person as the object of insurance subscription; if he/she dies, insurance money is paid), and the beneficiary (person receiving insurance money), the future inheritance tax or donation tax may or may not be imposed.
Case wherein the insurance policyholder, the insured, and the beneficiary are different
The benefit following the receipt of insurance money is assumed to have been donated to the beneficiary; thus, donation tax is imposed.
Case wherein the insurance policyholder is the same as the insured but different from the beneficiary
The insurance money becomes the asset of the object of inheritance taxation.
Case wherein the insurance policyholder is the same as the beneficiary but different from the insured
With regard to the insurance money, inheritance tax or donation tax is not imposed.
Case wherein the insured is the same as the beneficiary but different from the insurance policyholder
The benefit following the receipt of insurance money is assumed to have been donated to the beneficiary; thus, donation tax is imposed.
Case wherein the insurance policyholder, the insured, and the beneficiary are the same
The insurance money becomes the asset of the object of inheritance taxation.
How do I choose an insurance company?
Since a strict financial health standard is applied to an insurance company according to the insurance law, most insurance companies are safe. Since the competition in the insurance market is becoming more intense, however, we cannot guarantee that they will continuously maintain a good financial status. In the case of subscription to a long-term product such as life insurance in particular, the assessment of an insurance company’s financial health is very important. In this case, you can refer to the assessment of the credit ratings agency and actual management’s assessment at the Financial Supervisory Service. If you consider these documents unsatisfactory when choosing an insurance company, try to get help from a CFP certificant. He/She shall help you choose an insurance company with sound financial status based on various assessments.
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