Article by Lee Bromfield, CEO of FNB Life.
Editor's note: Since publishing, Wealth Planning became aware that as of August 2017 changes have been made to the National Credit Act. The NCA has introduced new provisions when ceding a policy for credit insurance.
Many 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.