Backdating For Cheaper Life Insurance
If you thought that backdating was the kind of dating you do on your back, it’s no wonder you were curious to know how it could save you money. Backdating actually means setting the start date of an insurance policy as some date in the past. This can save you money? It may.
The reason for backdating is that younger people pay lower insurance rates, and backdating enables an applicant to declare that the proposed insured is younger than he/she actually is. No, you won’t be deceiving anyone; you’ll still enter the true birthdate of the proposed insured on your application. Backdating is only performed at the consent of the insurance company and the government. Here’s the nitty-gritty on how it works:
An insurance policy’s effective date is the time when coverage starts. The effective date is also the time when the policy’s “original age” is determined. The original age refers to the age of the insured at the time the policy went in force and is one of the factors used to calculate cost of insurance. With term life insurance and traditional whole life insurance, this rate is locked in for the duration of coverage. With universal life insurance, the rate will increment every year, but the rate is still based upon the original age of the insured. By setting the effective date for a time when the insured was of a different age, you change the policy’s original age and, therefore, the cost of insurance.
In just a few minutes, you can compare quotes online to see that, although lowering a policy’s original age a number of years will lead to cheaper premiums, it won’t decrease your cost of coverage overall (as a general rule) because for every year that you backdate your policy, you’ll need to purchase another year of coverage: if I backdate my 10-year term life insurance policy 5 years, then I only get 5 years of coverage starting now. So why backdate at all? Backdating is intended for use over just a few months, not years. That is, if I had a birthday just a month or two ago, I can backdate my policy two months so that I get the rate that I would have had if my coverage had started before my birthday. Most state governments impose a six-month ceiling on backdating.
Let’s consider an example. Suppose that at age 50 I can get a 10-year term life insurance policy for $69.89 a month, but by backdating, I can apply as a 49-year-old and get the same term life insurance policy for $62.64 a month (these are actual quotes, by the way). That’s a substantial difference. (69.89 – 62.64) o 10 o 12 = $870. Granted that in order to backdate, I’m effectively paying for several months in the past (let’s say six months), leaving me with only 9.5 years of coverage ahead of me. (That’s $375.84 wasted.) So my net savings by backdating six months are $494.16. Nothing to crow about, maybe, but not bad for the amount of work it required (virtually nil).
In some cases, the cost of backdating (i.e. the month(s) of wasted premiums) can outweigh the money saved by getting rates for a younger age. In fact, offsetting the insured’s age by a single year may not even get you better rates in some cases.
On the other hand, backdating may be worthwhile even if the insured’s birthday was more than six months ago. (And conversely, it may be irrelevant even if the birthday was less than one month ago.) That’s because not all insurance companies use an individual’s actual age as the age basis for their calculations. Some insurance companies use an individual’s nearest birthday, which means that his or her age will increment yearly, six months before his or her birthday. And that means that backdating should be used to push back the policy’s effective date until it precedes the insured’s half-birthday, not his or her actual birthday.