What is ceding/giving up an insurance policy?
Ceding/giving up an insurance policy means that an insured
person transfers his or her insurance right or benefit in a
particular policy to another person as security for something
they wish to get.
For example: If Corrie, the insured person has a life policy at
a company called Bravo Insurance Pty Ltd and she want to get a
loan from a bank called Clever Bank Pty Ltd, she can give up her
benefit in the life cover to the bank in return for getting a loan.
The life cover will be the security for the bank in case Corrie does
not pay back the loan.
This also means that the bank will now have the first rights
to the benefits from Corrie’s policy. This is because Corrie, the
consumer has given her rights and benefits in the policy to the
bank. But it is important to note that Corrie will be responsible
for paying the premiums on the policy.
Why must Corrie pay the premiums when the rights and benefits are given up to the bank?
That is because Corrie will still be the policy holder. That
means that although the rights and benefits are given up to the
bank, all the responsibilities relating to the policy still remain
with her.
Does that mean Corrie loses her benefit in the insurance policy?
It depends on whether Corrie has paid back the loan to the
bank or not.
It also depends on the value of the policy benefit. Let us
consider the following facts and see what happens under two
different examples.
Corrie, who is the consumer, gets a loan from the bank and as
a result she must pay back to the bank a total amount of N$ 120
000. She has a life cover for the amount of N$ 150 000 with the
insurance company.
Example 1
If Corrie, pays the whole amount of 120 000 back to the bank,
then the bank will not be entitled to receive any benefit from her
insurance benefits. Therefore when she has paid off the loan at
the bank the cession will also be cancelled. When the cession is
cancelled it means Corrie will be entitled to the benefits on the
policy and not the bank. In this case Corrie did not loses any
benefit to the bank.
Example 2
If Corrie, pays only the amount of 100 000 to the bank, then
the bank will be entitled to receive the rest of the amount from
the insurer when the policy matures. In this case Corrie loses
some of the benefit.
If the bank is entitled to benefits from the policy when will they be paid?
This depends on what the policy states in terms of payment.
For example if the policy states that the policy will only be paid
out when the policy holder dies, then the bank will receive its
benefit then.
If the life policy states that the benefit will only be paid after
a fixed period has ended, for example when 10 years end, then
payment to the bank will only be made after the 10 years.