If you’re in the process of negotiating an international trade agreement, chances are you’ve heard of Incoterm cost, insurance, and freight. But when it comes to understanding what this term actually means, things can get a little hazy.
Fear not – we’ll provide all the deets on Incoterms CIF so that by the end of this post, you’ll have a thorough understanding of one of the most commonly used shipping and freight terms today.
What Cost, Insurance, and Freight (CIF) mean in Shipping Terms
The term CIF is often used for international shipping agreement and is usually stated in the contract of sale. CIF can also be viewed as a type of “all-in” pricing, where the seller is responsible for the full cost of destination proof of delivery.
This reduces the burden on buyers who may not have access to efficient or reliable logistics networks at their disposal.
In general, CIF incoterm are beneficial for buyers as it reduces their risks and costs while also providing more certainty of delivery.
Mostly, CIF (Cost, Insurance, and Freight) can be used for goods transported over ocean freight; both overseas and inland waterway shipments . These include bulk cargo, oils, and oversized goods, rarely used for air freight.
Furthermore, all parties should ensure that the goods in question meet all applicable legal requirements.
CIF Incoterm Buyer and Seller Responsibilities
- Prepares the Invoice and All Documentation
The seller assumes responsibility for obtaining and preparing all necessary documentation Export packaging to prove that the goods have been delivered. This includes commercial invoices, packing lists, bills of lading, certificates of origin, and insurance documents.
- Transport of Goods to Destination Ports
The seller delivers goods to the named destination port as per the buyer’s order, including any necessary export/import clearance and payment of transportation charges.
- Pays for Packaging, Marking, and Loading Charges
The seller is also in charge for paying the cost of export packaging, marking, and loading the goods to prepare them for shipment because of direct access.
- Marking Export Licenses and Customs Formalities
All export licenses and customs formalities necessary for exporting the goods are to be taken care of by the seller.
- Pays for Pre-Carriage and Delivery
During delivery, the seller bears all pre-carriage and delivery cost, including any customs clearance and port charges. Once the goods are delivered to the final destination, the seller must provide proof of delivery.
- Purchase of Cost of Pre-shipment Inspection
The inspections must be carried out at the seller’s expense in accordance with the agreed requirements before shipment.
- Minimum Insurance Coverage
The insurance by the seller should cover the minimum insurance required to ensure that the buyer is not overly exposed in case of loss or damage. Ideally, the seller does not have to obtain marine insurance.
- Pays for Goods as Noted in the Sales Contract
The buyer pays the full purchase price for the goods as noted in their sales contract.
- Discharge and Onward Carriage
All the discharge, unloading, and onward carriage import formalities of goods from the destination port are to be taken care of by the buyer.
- Provide Import Duties Cost and Formalities
As per the policies, the buyer is responsible for providing the necessary import duty and formalities, and other charges required to bring goods into the country.
- Pays for the Cost of import clearance
The clearance of goods from customs at the port of destination is to be done by the buyer, who must pay all associated costs and charges. When the buyer imports under CIF Incoterms, they pay customs duty and taxes on the product price, as well as on the cost of freight and insurance.
Merits and Demerits of CIF incoterms
Seller Pays for Minimum Coverage
The seller is obliged to pay for the minimum insurance coverage for goods in transit, which means that the buyer does not have to bear any additional costs. This provides some protection for buyers if anything goes wrong during transit.
Reduced Risks of Losses
The cost, insurance, and freight (CIF) agreements imply that the seller is responsible for all losses and damages suffered by the goods from when it leaves the country until the cargo arrives, which reduces the buyer’s risk.
The Buyer Does Not Have to Worry about Declaring the Shipment
Once the buyer has accepted the cost, insurance, and freight terms, they can sit back and relax, knowing paying freight charges and insurance has been allocated to the seller.
The buyer assumes the risks and does not have to worry about having to declare the shipment for customs clearance or dealing with other fees associated with international shipping as long as the goods are loaded main carriage.
Higher Total Cost for Goods
The cost of goods sold under a CIF agreement may be higher than those sold under other terms due to the added cost of insurance, which can add up over time.
The Insurance Paid can Fail to Meet Any Claim
The insurer can fail to meet any claim from the insurance paid for goods damaged or lost during transit, meaning that the buyer may be left to bear the full cost of replacing goods. There is a higher likelihood the seller can face a hard time getting money from your insurance claim.
Using Credit Letter with the Incoterms CIF
Cost, insurance, and Freight and credit letters have a few similarities, but there are also many differences. The cost insurance and freight (CIF) Incoterms must be used alongside a credit letter in order to have a successful transaction.
When used with CIF, a credit letter serves to provide assurance to the seller that payment will be received on time and in full according to the stated terms.
The credit letter also outlines who is responsible for any costs associated with shipment of goods, such as insurance or freight charges. Additionally, it describes any restrictions or limitations on the goods being sold and shipped.
Using a credit letter with CIF can help to ensure that both parties are held accountable for the terms of the sale transaction. It ensures that payment is received in full and on time according to the agreement, as well as protecting both parties from potential financial losses due to unforeseen circumstances.
It also helps to ensure that goods are shipped in accordance with the terms of the agreement and that any associated costs are properly covered.
When used alongside CIF Incoterms, a credit letter can help to ensure that the terms of the sale are properly fulfilled and that both parties remain accountable for their respective obligations.
This is especially beneficial in international transactions, as it helps to protect all parties involved from potential disputes or losses related to shipping goods or payment issues.
Changes and Update of CIF Under Incoterms 2020
The revision of Incoterms 2020 includes changes to the Cost, Insurance, and Freight (CIF) trade terms.
- Under this incoterm rule, the seller remains responsible for arranging and paying for shipping, insurance, and freight costs up until the named port of destination.
- The buyer is responsible for any additional costs once the goods have arrived at that port.
- The most significant change in the Incoterms 2020 revision is that the seller’s insurance responsibilities are now extended to cover any additional risks that may occur after the port of destination has been reached. This means that, under CIF terms, seller is responsible for providing proof of adequate insurance cover for any potential losses or damages that could occur during unloading or any subsequent transport within the buyer’s country.
- Besides, CIF Incoterm now requires that sellers provide buyers with a detailed commercial invoice, as well as all relevant customs documents (such as certificates of origin).
- Finally, all necessary paperwork must be provided to the buyer in order for it to clear customs and take ownership of the goods.
Differentiating CIF and Free on Board (FOB)
The main difference between Cost, Insurance, and Freight (CIF) and Free on Board (FOB) is who pays for the shipping cost.
In CIF, the seller will handle all costs associated with getting the goods shipped to their destination port, including insurance, shipping fees, and other transport-related expenses. Seller can only use CIF when they hold expertise in local customs and are willing to handle the costs.
On the other hand, in Free on Board (FOB), the seller transfers all of the risk and costs to the buyer and who is responsible for paying for all of the transportation costs and other related fees loaded onto the shipping vessel.
The seller and buyer can also decide how much responsibility each party has in terms of insurance, customs clearance, and even the risk transfers or damage during transit.
Ultimately, CIF and FOB have their pros and cons, depending on the situation. CIF is great for buyers who don’t want to bear the cost of shipping bulk cargo and other related expenses, as it’s all taken care of by the seller.
However, sellers may not like this arrangement as they have to assume greater responsibility and risk transfers.
On the other hand, FOB can be beneficial for sellers, as they don’t have to pay for the shipping and related costs. Buyers may have to bear all the risks associated with their shipment and may not be able to take advantage of any insurance policies that might be available at the destination port.
Finally, you learn what it means and why you need to know about Intercoterm CIF. Not just knowing the acronym.
While it isn’t as exciting as shopping online understanding, Incoterm cost, insurance, and freight agreement is an essential part of international trade, especially in importing process.