Getting Lower Premiums: Should You Backdate Your Life Insurance Policy?
Life insurance can be costly, but there are a few things you can do to secure cheaper premium payments. Backdating a life insurance policy is a common strategy that can significantly reduce your quote and increase your savings. However, it's not always a good idea – there are some situations where backdating isn’t the best choice.
This guide outlines all the essential information on policy backdating. Read on to learn when you should consider backdating and when you shouldn’t.
What Is Insurance Policy Backdating?
Backdating life insurance refers to the practice of listing your policy’s effective date before your actual date of application, up to six months prior. While doing this with car insurance and other legal documents is illegal, it’s a perfectly acceptable practice when it comes to life insurance policies. Backdating life insurance usually results in lower life insurance premium payments and bigger savings, for reasons we’ll explain later in this guide.
How It Works
Insurance policy backdating revolves around the concept of a client’s insurance age. The insurance age is based on a person’s nearest age rather than their actual age. With this in mind, some life insurance companies do count your actual age as your insurance age, but computations based on the nearest age are much more common.
To understand insurance age, you must first understand the concept of a half birthday. A half birthday is six months after your actual date of birth. This is important to your life insurance company because you are more likely to die the older you get. And the more likely your death is, the higher they have to charge to insure you.
If you apply for insurance before your half birthday, your insurance age and actual age are the same. But if you apply after, your nearest age is your actual age plus one. That’s because you’re physically closer to your insurance age than your actual age, and age is a major factor in how each client’s insurance rate is determined.
Let’s look at an example. A 40-year-old client applies for life insurance more than six months after their birthday. In that case, they’ll be considered 41 for insurance purposes – resulting in a higher rate.
However, by listing the policy date before the half birthday, the applicant can qualify for the lower premium rates associated with the younger age. Still, a client is on the hook for all payments, including money owed for backdated months.
For example, if you signed up for a policy in July and had it backdated to March, you still have to pay the insurance company for March to June premiums.
How Long Can I Backdate My Life Policy?
There is a limit to how long you can backdate your life insurance. State laws, and therefore insurers, usually allow you to backdate up to 6 months. This protects your insurance company from significant financial loss, but it also ensures that you don’t have to catch up with too many “missed” life insurance payments.
How To Know If Backdating Is For You
Backdating your policy requires forethought and planning, especially because you have to pay all the “missed premiums” before your policy is activated. Before asking your insurance agent to backdate your policy, you should ask yourself the following questions:
Considering your insurance age, how much will you save annually or monthly?
How much money will you have to pay upfront?
How much time will it take before you break even on the extra premiums?
Based on this information, you’ll be able to decide whether backdating makes sense for your specific situation.
When Should I Backdate My Policy?
If you’re wondering when you should backdate your policy, don’t worry. This section covers scenarios where this option makes the most financial sense.
If You’re Above The Age Of 30
Generally speaking, life insurance rates increase as you age. This is especially true when you’re over the age of 30 – at this point, premiums increase significantly every year.
Applicants above the age of 30 should consider backdating their policies if they intend to purchase new life plans. On the other hand, potential policy owners in their twenties may find that backdating isn’t worth the effort because the change in premiums is usually negligible.
If You’re Applying After Your Half Birthday
If you’re applying within 6 months of your actual birthday, you don’t have to worry about backdating your policy. You’re already getting the best possible prices for your situation and age.
Reasons You Should Backdate A Policy
This section describes the three main benefits of backdating your life insurance: lower life insurance premiums, early policy maturity, and more control over your renewal date.
Lower Life Insurance Premiums
One of the main reasons an applicant may want to backdate is because insurance companies will give lower life insurance quotes. A typical policyholder can save hundreds or even thousands of dollars in premiums over the life of their policy – just by moving the effective date back a few months.
Early Insurance Policy Maturity
Although it may not be a major consideration for many policyholders, backdating your life insurance can reduce your policy's tenure and expedite its maturity. This is especially useful for life policies that have a maturity benefit – you’ll be able to take advantage of it much earlier than if you didn’t backdate.
When a life insurance policy matures, the policy owner can withdraw the cash value without penalty. For example, let’s say an applicant buys a policy that matures after a 20-year term. By backdating their life insurance policy, they’ll be able to receive money from their insurance companies a few months before the term completes.
Specific Renewal Dates
An applicant may want to backdate their life insurance policy so its renewal date coincides with another important event, like a birthday or an anniversary. This makes it easier for some people to remember when to contact their life insurance agent about policy renewals.
Reasons Not To Backdate Your Policy
Backdating helps many people find the best possible life insurance quotes for their age. However, that doesn’t mean everyone should consider it. This section describes the three situations when backdating your life insurance application doesn’t make sense – and may even cost you more in the long run.
If you apply for a policy when you’re young, you’re likely already getting the best possible life insurance quotes for your age. If not, they’re at least low enough that backdating would not be worth the trouble.
You may still be tempted to backdate so you can save a little bit of money. But under the age of 30, the year-on-year premium increase is negligible – while you may save something, it’s likely just a few dollars a month. Considering that you’ll have to pay a few months upfront, a backdate in this scenario would be detrimental to your finances.
The younger you are, the more you’ll have to backdate to see a significant difference in your life insurance rates. But since life insurance companies usually limit backdating to a maximum of six months before the application date, there’s really no point.
You Can’t Afford It
While backdating may be an excellent way to save money in the long term, the upfront costs aren’t cheap. That’s because your life insurance agent will require you to pay the premium rate on any months that have officially “passed”, which can be hundreds of dollars depending on your age and risk level.
This has to be done before your life insurance can be considered active. Some applicants may find the cost of entry far too high to offset the potential savings.
You Have A Term Life Policy
Backdating benefits older people because it helps them secure a lower premium rate. This applies no matter what type of life insurance policy you have. However, we’d recommend that term life owners skip backdating.
Term life insurance, by nature, provides coverage for a specific period. After this period, the term life plan expires and can be renewed. If you decide to backdate your term life policy, you’ll essentially be wasting its limited life coverage for a lower premium rate, which may not pay off in the long haul.
To illustrate this point better, let’s say you have a 20-year term life policy and you want to backdate to secure a cheaper premium rate. In this case, your insurer would list the term life plan’s activation date six months before your actual application date. That means your policy would also expire 6 months earlier than the intended date, leaving you without coverage sooner.
When it comes to life insurance, the bottom line is you should get the best bang for your buck – and backdating your policy is a great way to do that. However, the benefits don’t apply to every situation. In some cases, the savings you get with a backdate may not be worth the hassle.
We can help you make the right financial decision. Get in touch with Wesley Insurance, LLC for more information on backdating!