Doing your homework before signing on the dotted line when it comes to life insurance and using it to cede a loan can save you and your loved ones from a lot of confusion and frustration when it comes to the claims process. But what does it mean to cede a life insurance policy?
What does it mean to cede a life cover?
Purchasing property is a major investment that most of us plan to make. It is also a major financial step for many, meaning that most people will take out a loan to help secure a property they have their eye on. However, it also means that you will have to prove that you will be able to pay off the loan.
If you have a life insurance policy in place, you can use it to cede a loan as collateral to position yourself better with lenders. When you cede your cover, this means that you give the bank or a lender the power to claim the amount that you owe from it. It is better to understand how doing this will affect your policy during the claims stage to avoid any confusion.
How does it affect you when it comes to claims?
What people tend to overlook is the amount that you owe to your lender. Your lender will be allowed to deduct this owed amount from your life insurance before your claim is paid out to your loved ones. This means the amount that they will receive at the end of it all decreases. Depending on your estate planning and estate duties, it could affect the time it takes for your beneficiaries to receive the life insurance payout.
What to do before you cede your cover
Having a clear understanding of what you are getting into is crucial. This means:
Carefully read the terms and conditions. Glossing over this section can be costly for you and your loved ones. Carefully read this before you put your name on the dotted line to have a clear understanding of what you are taking on.
Ask questions if you are not sure. Speak to your insurer regarding anything you don't understand, especially when it comes to ceding your cover. The same can be done with your lender to avoid any confusion.
Inform your beneficiaries. You can choose to tell your beneficiaries that you have listed on your cover or a trusted person in terms of what you plan to do. It will let your loved ones know how it will affect your policy, making the claims process easier for them.
Keep the exclusions of your policy in mind. Another segment to carefully read when it comes to your policy is the exclusions. This is a list of things that your insurer will not cover or can cause a claim to be denied, which will affect the paying off of your home loan.