The effective date is an important of any term life insurance policy. It can affect the price you will pay and more importantly, how soon you will actually be covered. In most cases, this may not matter but occasionally, it makes all the difference if the applicant passes away shortly after completing the application. In some cases, life insurance companies will allow backdating this date. Let’s look a little closer at how this works.
Backdating has been in the news but only referring to the scandalous behavior regarding insider stock purchases. The type of backdating we’re discussing involves your life insurance effective date and no such stigma. Essentially, some carriers may allow you to backdate your effective date. First, what is it and what’s the impact of doing this?
Backdating is where a insurance carrier allows the applicant to apply a different effective date than the actual application date. State laws usually do not allow backdating more than 6 months prior to the application date. With that fact, if the carrier allows backdating, roughly half of the applicants may benefit from such a move during the calendar year. There’s usually a spot right on the term life insurance application to request such an action. As with all issues regarding the technicalities of term life options, we recommend that you run your situation through us as licensed life insurance agents to make sure it’s the right move.
The biggest issue may be the term life insurance rate that you are charged. A big factor that drives life insurance cost is your age at the time of enrollment. In our term life and age effect article, we go in detail as to how important age is in determining your final rate. It might be the biggest consideration which is the premier reason not to wait. Backdating allows an applicant to qualify under a younger age and consequently, a lower rate.
For example, let’s say a person is 39 and 9 months old and the carrier is applying the nearest age approach to designating his/her life insurance premiums. If we go based solely on his application date, the rate will be based on age 40. If the carrier allows the applicant to backdate 3 months, the new rate would be based on age 39. This can add us to real money when you figure that the term life policy may be active for years if not decades.
Most life carriers have either minimum or maximum allowable age ranges. Backdating may allow a person who wouldn’t qualify based on these ranges to now be eligible for term life. If the maximum age to be eligible for life coverage is 80 and you are 79 and 8 months, backdating would allow you to qualify if you go back 3 months assuming the rating is based on nearest age.
Is there a downside? The term life applicant will need to pay for the preceding time…essentially time that has already passed (obviously without any issues). So you need to weigh this lost premium versus the savings over the life of the term life policy. Again, we would be happy to help here.