Cost, Insurance and Freight (CIF) - Definition, What is Cost, Insurance and Freight (CIF), Advantages of Cost, Insurance and Freight (CIF), and Latest News - ClearTax (2024)

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Cost, Insurance and Freight (CIF) - Definition, What is Cost, Insurance and Freight (CIF), Advantages of Cost, Insurance and Freight (CIF), and Latest News - ClearTax? ›

Meaning of Cost, Insurance and Freight (CIF)

Cost, Insurance, and Freight (CIF) is one of the 11 Incoterms® rules set by the International Chamber of Commerce. It's an international shipping agreement, which represents the charges paid by a seller to cover the costs, insurance, and freight of a buyer's order while the cargo is in transit.

However, the buyer assumes responsibility for the goods once the cargo has reached the buyer's port. CIF is different from cost and freight (CFR), which is when the seller is responsible for the shipping and freight costs, but under CFR, the seller is not responsible for obtaining marine insurance.

CIF stands for Cost, Insurance, and Freight. The seller covers all transport costs to the buyer's destination port, insurance for the shipment through its final delivery.

The term “carriage and insurance paid to (CIP)” signifies that the seller will pay freight and insurance when sending goods to a buyer's representative at a mutually agreeable location. The seller must insure the goods being sent for 110% of their contract value.

CIP vs CIF

The two incoterms are very similar, except that CIP is used for all modes of transport, whereas CIF applies to sea freight only. This also means that for CIF, responsibility transfers at the origin seaport, whereas for CIP it transfers at any agreed-upon location in the origin country.

Cost, Insurance and Freight (CIF) is an Incoterm rule that is identical to the CFR Incoterm rule except in one aspect: insurance. Even though the risk transfers to the seller upon loading the goods on board the vessel, in CIF, the seller is obliged to take out insurance cover for the buyer's risk.

As a buyer, CIF gives you less flexibility than FOB. With CIF the seller arranges transportation so the buyer has little to no involvement. Yet with FOB, the buyer has much more flexibility and control to choose the carrier and negotiate shipping rates, which can help reduce costs.

One of the main benefits of CIF for the buyer is that it reduces their upfront costs and responsibilities for the goods. The buyer does not have to pay for the freight or insurance until they receive the invoice from the seller, which may improve their cash flow and budgeting.

To calculate CIF accurately, one must grasp three fundamental components: the cost of the goods, the expenses associated with insuring the goods, and the freight or shipping charges. The CIF value is calculated by the formula CIF = C+I+F.

What is the risk of CIF? ›

With CIF, risk is transferred only when the goods are loaded on board the ship at origin. This makes CIF unsuitable for containerized cargo, which is usually dropped off at terminal days prior to loading. This creates a grey area during which cargo could unknowingly suffer damages.

CIF Incoterms will usually define the beneficiary as the seller, and if your shipment is damaged, you may only find out after the container is unloaded, and you have paid the final amount to your seller. In that event, the seller completed the transaction and the insurance claim would go to the seller, not the buyer.

CIF is considered an expensive option when buying goods. That's because the seller may use a transport carrier of their choice who may charge the buyer more to increase the profit on the transaction. Communication may also be problematic if the buyer relies solely on people who act for the seller.

In Carriage and Insurance Paid To (CIP), the seller assumes all risk until the goods are delivered to the first carrier at the place of shipment—not the place of destination. Once the goods are delivered to the first carrier, the buyer is responsible for all risks.

CIF offers several notable benefits for buyers. The inclusion of insurance coverage is a primary advantage over other Incoterms. Goods shipped under CIF terms are shielded until they reach the designated destination port, providing an additional layer of protection against unexpected events.

That's because CIF is generally used in shipments of lower-value goods than CIP. In both cases—CIF and CIP—the insurance should cover, at a minimum, 110% of the value of the goods as provided in the sales contract. The insurance should cover the goods at least to the point of delivery.

CIF Free Out means CIF is as defined in the most recent edition of INCOTERMS (2010) as published by the International Chamber of Commerce (Paris, France) and Free Out means that Buyer shall arrange for and bear the expenses of unloading the Parcel form the vessel's hold at the Port of Discharge.

CIF gives the seller more control over logistics, enabling them to choose their preferred carrier and insurance provider. FOB, on the other hand, gives the buyer more control over logistics. With FOB the buyer can opt for the carrier and insurance cover of their choice once the goods are loaded onto the ship.

Insurance Requirements

CIF requires insurance for cargo, CIP does not. Goods under CIP must be insured by both parties; buyer/exporter and seller/importer, but only with respect to the period up until delivery of goods at the destination port.