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Factors to consider when ceding your life policy

by | May 7, 2018

By Lee Bromfield, CEO of FNB Life

ceding life coverMany consumers who are eager to finalise the house-buying process often rush into taking out and ceding life insurance without first doing their homework.

The ceding of a life policy involves legally transferring a portion of the cover amount to be used as collateral by a creditor in the event that the policy-holder is unable to meet their debt obligation.

When applying for a home loan, banks may require that you take out life cover as security if you do not meet certain earnings criteria. The life cover is then ceded and used as collateral against the home loan to ensure that your loved ones or beneficiaries still have a home in the unfortunate event that you pass away.

Key factors to consider when ceding a life policy:

  • Cover amount – when ceding an existing life policy, it is recommended that you increase the cover amount to avoid leaving your beneficiaries underinsured in the event that you pass away. This is because a portion of the cover amount will now be used to settle the home loan. You also have the option of taking out a new life policy or mortgage protection plan if you do not want to interfere with your existing policy. If you are taking out a life policy for the first time, consider a higher cover amount to ensure that your family or dependents are also protected financially in the event of death.
  • Inform beneficiaries about the cession – it is important for your beneficiaries to understand how this process works to avoid unnecessary complications should they have to claim.
  • Joint home loan – when applying for a joint home loan, the bank may require both parties to take out life cover to insure their respective portions of the loan, should one or both of them pass away before settlement.
  • Home loan settlement – when the home loan account has been settled and closed, it technically means the policy is no longer ceded. It is therefore important for you to immediately follow up with your lender and insurer to update the status of the policy.
  • Ceding conditions – before ceding, familiarise yourself with the terms and conditions stipulated by your lender, to understand how they impact your life policy.

Although home loan providers may make it mandatory for you to have life cover in place, it doesn’t mean you shouldn’t take your time to go through the policy wording or seek advice when you need clarity. At most, you will delay the process by a day or two, while making sure that you are adequately covered.

This article first appeared in City Press.

9 Comments

  1. How do I go about cede my life policy from Sanlam over to cover the outstanding amount on my bond with Absa

    Reply
  2. My life insurance policy has been in place for a long time and is much more than adequate to cover my current loan taken with a bank 2 yearsago. Can I cancel the credit life insurance linked to this loan and substitute it by ceding a portion of my life insurance policy? If so how do I go about doing that?

    Reply
    • You have a right to do so under the National Credit Act but they could require a “like for like” cover. For example, your life cover would need to include the elements offered in the credit insurance policy which may include disability cover and retrenchment cover. Best to confirm with the bank. Keep in mind a few things: do you need your life cover for other needs like providing for your family? Does your credit insurance premium reduce in line with the mortgage balance? It should be matched to your outstanding balance.

      Reply
  3. what happens to the ceded life cover when the bond is fully paid?

    Reply
    • You must request the bank to remove the conditions and inform the life company

      Reply
  4. Is it advisable to have both home loan protection as well as house insurance when having a bond, and they both increases premium on yearly basis

    Reply
    • yes you can have nominated beneficiaries but they only receive the money after the mortgage/debt is settled

      Reply

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Maya Fisher-French author of Money Questions Answered

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