Backdating For Cheaper Life Insurance
Can paying for coverage you never received save you money
? If you're still reading, you've probably guessed correctly that the answer is "yes," and now you're just wondering how and why. The answer is backdating: set the effective date of your life insurance policy to a time before the policy's actual inception.
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.
Comparing a few life insurance quotes can show you in just minutes that backdating a policy a few years will get you lower rates, but it usually won't save you money because you have to pay for several additional years of coverage. (If you want 20 years of coverage but backdate your policy five years, you'll need to buy a 25-year term life insurance policy.) Is backdating a crock, then? No, backdating is just used on a smaller scale, to offset a policy's effective date by only a few months so that if a proposed insured had a birthday recently, he or she can be insured as though the policy was begun just prior to his or her birthday. In fact, state insurance laws generally prohibit backdating of more than six months.
Here's an illustration of backdating, using actual quotes I collected this morning. At age 50, I can get a term life insurance policy for ten years at a monthly premium of $69.89. If my birthday was six months ago, I can backdate my policy to get the rates I would have had at 49 years of age: $62.64. That's a difference of $7.25 per month, which translates to $870 over the 10-year lifetime of the policy. Since I'm backdating, though, my policy is going to end six months sooner than it would have done, so I've effectively blown six months' premiums ($375.84). That makes my net savings $494.16 for backdating six months. If my birthday were recent enough that I could backdate only one month, my net savings would be $807.36.
Backdating won't always save you money. The cost of the extra months of coverage may outweigh any savings you'd get by using a younger age. What's more, applying for an age one year younger may not even get you a lower quote!
Another reason why backdating may not behave quite as you expect is that not all insurance companies use the same age basis for determining a policy's original age. Some insurers consider the most recent birthday of the proposed insured (which is how we normally measure age), but some insurers consider the nearest birthday. That means that a person's "age" could increase six months before his or her birthday. For some people, this will make backdating completely irrelevant, for others, this will make backdating useful.
by: Mark Manderson
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