The first possibility is that the insurer might pay the full policy proceeds to the bank, as some insurers believe that a security cession revokes the beneficiary designation while the cession is in effect.
The second possibility is that the insurer might inquire with the bank about the exact outstanding amount regarding the mortgage and pay only that amount, with the remaining policy proceeds then being paid to the designated beneficiary.
In the first possibility, the bank’s view will be extremely important. If the bank believes that the beneficiary designation is revoked by the cession, the balance of the proceeds will be paid into the client’s estate.
However, some banks pay the balance to the designated beneficiary(ies) as shown in the policy contract.
Banks typically request a security cession (via a life insurance policy) when entering into a mortgage. This is used to pay off the mortgage in the event of untimely death. All banks handle security cessions in different ways.
Because the person is unaware of the impact of the cession on their beneficiary designation, the remaining policy proceeds might ultimately be inherited by the wrong individuals.
Individuals should therefore ensure they are aware of the relevant implications of security cessions when ceding policies to financial institutions.
Keep in mind that every scenario will have its own facts and consequences.