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How To Cede A Policy

29th October 2009

I sincerely admire the many entrepreneurs who manage to grow their businesses with very little resources and never having to borrow or get bank loans. However, not all of us can pull it off. For those of us who just do not have enough resources and need loans, nowadays the banks and financial institutions require some kind of collateral from the borrower. As the loan industry has evolved the options on what to offer as collateral have also evolved.

InvestingIt is quite rare to borrow money nowadays from lenders without them requiring you to give them some sort of collateral especially in the wake of the recession. In fact with most commercial banks it is a requirement for securing a loan. Let's take a quick look at the definition of collateral. Collateral is defined as a security pledge either in the form of securities, property or evidence of deposit pledged for the repayment of a loan.

With this in mind, as a small business owner you may be at a stage in your business where you require financing to prepare yourself for growth or position yourself to grab a bigger piece of the market pie. This means most likely you will need a business loan. I am quite nervous about offering my house as security for a loan, however there are other options. One that I like is to cede a policy. The type of policy often used as security for a loan is life insurance. Ofcourse the amount that the policy is worth should be adequate to cover the loan you are trying to borrow.

Take a copy of the contract of your life insurance policy to the bank or lender. Tell your banker that as a security for the loan you want to borrow, you will cede the policy as collateral. What it means to cede the policy is that for the period of the loan agreement you surrender the policy over to the lender in the event that you fail to pay then the insurance can payoff your loan. This is a better option than to lose your house in the event that you fail to repay the loan. What happens when you go to the bank with the policy is that you will be taken to their securities department by your banker and required to sign some documents allowing them to contact your insurance company to cede the policy to them.

However, in ceding the policy, you should also be smart about it. If you borrow $100,000.00 plus interest and the policy is worth $400,000.00 then tell your banker that you will cede them the loan amount and contact your insurance company to tell them the same. Make sure the contract you then sign to cede the policy also states this. The remaining amount of $300,000.00 you can then still leave for your beneficiaries e.g. children, spouse in the event of death. So this is a win, win situation the way I see it and a better way to get a business loan.


"The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow. " - Rupert Murdoch

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