How backdating your life insurance can save you money (and why it's totally legit)

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How backdating your life insurance can save you money (and why it's totally legit)

When you buy life insurance, there may come a time near the end of the process where your broker or agent will talk to you about backdating the policy. If this happens, don't panic—your broker didn't just turn into a con artist. When it comes to life insurance, insurers will let you backdate a new policy a few days or even months, if by doing so you can get a lower premium.

It's a little unfortunate that the word "backdating" is used for this concept, because with some other insurance products backdating can be a very bad thing. Take auto insurance, for example: if you backdate your car insurance policy so that it says you were covered for an accident you had the month before you actually bought the policy, you'll be committing fraud. You do not want to backdate your auto insurance policy.

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Life insurance is different because by making your policy retroactive by a short period, the insurer isn't taking on any more risk. It's unlikely that you actually died last month and are faking being alive today so you can cash in on a death benefit. (If this is the case, thanks for stopping to read this while I run in the other direction.)

But while that explains why life insurers don't mind backdating, it doesn't explain why you'd want to bother with it. The reason has to do with your age and how it affects the price of your new policy.

With life insurance, as your age goes up so does your premium. For example, if you turn 35 around the time you apply for a new policy, you could end up being charged a slightly higher premium for being 35 instead of 34.

Big deal, you may think. With a little planning you can surely avoid mixing your birthday up with your life insurance application. But because of how insurers determine age, there can be up to a 6 month window when the insurer considers you 35 even though you're still 34.

"That makes no sense!" you mutter. Clearly you are not an underwriter.

Here's how this can happen. Your insurance company may use something called your "insurance age" or "insurance birthday" when processing your application. (Not every insurer does this.) The insurer will look at the midway point between your birthdays and round your age up or down depending on which birthday is closer. For example, if you turned 34 on January 1st and you apply for insurance on July 4th, you might be considered 35 on your insurance application even though your next birthday isn't for almost 6 months.

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This is why insurance companies let you backdate. In the example above, you might be able to get a cheaper premium if you backdate the start date of the policy to June 4th, because then your "insurance age" will be 34.

Just remember that backdating isn't free. You'll have to pay the premium for those weeks or months that are now part of your newly backdated policy. When you're deciding whether it's worth it to backdate or not, be sure to factor the extra premiums into your calculations. It might be a year or two before you see any savings, so if you're not planning on keeping the policy for longer than that it may not be worth the trouble.

Backdating your life insurance isn't as useful for younger applicants because the difference in premiums from year to year won't be that wide. As you get older, though, you'll see bigger jumps in your premiums with each birthday. If you're over 40 and shopping for life insurance, backdating can be a handy—and completely above-board— way to save a little on your new insurance policy.

Photo: Stefan