What is a policy cession?
A policy cession is the transfer of one party’s (the ‘cedent’) personal right to a claim to another (the ‘cessionary’). Any rights which the cedent had on that policy will now be transferred to the cessionary. In the case of a claim, the insurer will now pay benefits to the cessionary and not the cedent who ceded their policy.
What does it mean to cede a policy?
To cede a policy means that for the period of the loan agreement, you surrender your policy over to a lender in the event that you fail to pay, so that the insur-ance can settle your loan in the event that an insured event takes place, i.e. death or disability. You may be required to sign some documents allowing the lender to contact your insurance company to cede the policy to them.
Why would anyone give away their right to claim?
You may wonder why anyone would give away the benefits to his/her policy, when he/she’s been paying premiums on it for years? A few entrepreneurs manage to grow their businesses with very little resources and never having to borrow or get bank loans. However, not everybody is so fortunate and for those who just do not have enough resources and need loans, nowadays the banks and financial institutions require some kind of collateral or security from the borrower. As the loan industry has evolved, the options on what to offer as collateral have also evolved.
What are the benefits of a policy cession?
There are many benefits that a person can derive from a life policy. The most common benefit is that you can use your life policy as a means to get a loan. Nowadays, most creditors/lenders demand some form of security or collateral so they can recover their money if the borrower does not pay in case of an insured event taking place, i.e. death or disability.
Another benefit is that policy cessions give you considerable flexibility in your finances. You can decide which policy to give away, for how much (whether partially or fully), to whom, and for how long.
Lastly, another benefit is that you can give away a policy as a gift; for instance, you can give your daughter a policy as a wedding gift to help launch her journey into adulthood.
Can a policy be ceded to more than one lender/creditor?
Yes, it is possible to cede one policy to more than one lender. In ceding the policy, you should be smart about it. It is not necessary to cede the entire value of the policy. If you borrow N$100,000 plus interest and the policy is worth N$400,000 you can tell your lender that you will cede them the loan amount and they should contact your insurance company to tell them the same. Make sure the contract you then sign to cede the policy also states this. You can cede the remaining amount of N$300,000 to another party or leave it for your
beneficiaries, e.g. children, spouse in the event of death. So this is a win-win situation and a better way to get a loan.
Similarly, a condition can be made when ceding a policy that it cannot be re-ceded. If, however, the cession is outright – meaning all rights to ownership pass -, the new owner may handle the policy in any way, including surrender-ing, borrowing or re-ceding the policy to someone else. The insurer must be informed about all cessions and their cancellation.
What are the disadvantages of ceding a policy?
While policy cession is perfectly legal and might help provide you, the borrower, with access to finances, there are dangers such as: the limits of the rights to a claim or even removal of your rights as the cedent in the event of your death, the cessionary will get paid first, and only then will your beneficiaries get the balance (if any). You must pay your debt in full to the cessionary before your policy can be freed.
Borrowers can find themselves at the mercy of a contract that forces them to surrender the security on default. There’s another twist that happens regularly whereby the lender is not obliged, even at the request of the borrower, to cash in on the collateral and settle the outstanding balance, thus prolonging the term of secured loan and the interest accrued.
Which policies can be ceded and who is involved in policy cessions?
The main types of financial institutions involved in policy cessions include banks, investment houses and of course the insurers themselves. The types of policies that can be ceded include: savings, endowment/sinking funds, and life cover.
However policies such as funeral policies cannot be ceded because when you pass away you must, by law, be buried or cremated, meaning the benefits of funeral policies can only be used for this purpose. Retirement annuity policies can also not be ceded because the monthly premiums must be paid out to you for your living expenses as well as study policies (in most cases), because when your child finishes school there must be funds available for his/her tertiary education.
What should you know before ceding your policy?
It is important to know that the type of policy often used as security for a loan is life insurance and of course the amount that the policy is worth should be adequate to cover the loan you are seeking to borrow.