Many of us have either or would like to purchase a house one day. We all dream of buying it cash without any debt. Unfortunately, most of us are not in a position to do this and will need a home loan. Taking out a home loan comes with certain risks. Interest rates change and this can affect your monthly repayments. In the event of death, the loanees family will be responsible for paying the outstanding debt.
One way of protecting your family against this is to take out a life policy to protect against death. Some banks are satisfied with you just having life cover while other banks will require you to cede that cover to them.
So what does it mean to cede?
A cession is the transferring of part or all ownership rights of a life policy to a third party. This removes rights for the life insured to cancel the policy or make any amendments to it.
Cessionary:
The person ceding their policy to a third party
Cedent:
The third party receiving some or all of the rights to the policy
What are the 2 types of Cessions?
Absolute Cession
There are 2 types of cessions. The first is an “Absolute Cession”. This is when you transfer all of the policy owner rights to a third party. The cessionary is now the new owner and the only party that is allowed to cancel or amend the policy in any way. They will also be the only party able to cede the policy back to the cedent. This type of cession is used during a divorce or a buy and sell agreement.
Collateral Cession
The second type of cession is a “Collateral cession” or a security session. This cession is used in securing a loan through a bank for the likes of purchasing a house. These cessions are temporary in nature. The cessionary (the bank) will ultimately cede the policy back to the cedent once the debt has been covered. Policy holders can cede a portion or the entire policy depending on the amount needed as collateral by the cessionary. Unlike absolute cessions, the cessionary’ s rights are very limited as the policy owner is still the outright owner of the policy and can amend/cancel it.
What to consider when ceding a policy:
When taking out life cover for a cession, it is best to compare life insurers. Reason being they offer more affordable premiums than banks. Taking a policy out with a Life Insurer ensures that you can have the policy ceded back to you once the debt has cleared. In some instances, the existing life cover you have may be enough to cover the debt of the home loan.
There are a few important things to consider when doing a Collateral Cession:
Cover Amount
When ceding your policy to a bank for a home loan, you have to consider the cover amount taken out in the life policy. It is always best to take out extra life cover over and above the amount being ceded to the bank. This amount will be used to cover your family financially in the event of your death
Inform Beneficiaries about Cession
Should you have an existing policy before choosing to cede it, the existing beneficiaries should be notified of the cession to avoid complications at claims stage
Joint home loan:
When taking out a joint bond, the bank might need both parties involved to take out life cover and cede both to the bank should one of them pass away before settlement
Home Loan Settlement
Once the loan has been settled, it is important that the policy gets ceded back to the policy owner. If the policy is not ceded back to the cedent, then the bank may remain as a beneficiary on the policy and can be entitled to any proceeds.
When considering taking out life cover, one needs to investigate the reasons for doing so. Should the reasons involve cover for a debt like a bond or a buy and sell partnership, one may need to consider a cession. Whichever type of cession is used, it is important to know the legalities and terms and conditions around them before going ahead with them. It is best to speak to your financial advisor before making an important decision like this.
Our number one job as a financial planner is to listen to you, understand your goals and provide the best objective advice. The correct plan will provide peace of mind. Here at Growmatter, we want the best for our clients and we are committed to working together.
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The information provided is not intended to address the specific circumstances of an individual and is for information purposes. Should you require financial advice please contact us at info@growmatter.co.za
