By Richard F. O’Boyle, Jr., LUTCF, MBA
Did you know that it’s possible to backdate a life insurance application to lock in a younger age? Most life insurance companies use what they call “insurance age” when calculating your initial monthly and annual premium. You get a year older six months before your actual birthday.
Each year you wait to buy insurance, the premium rises a little. But if you can lock in a slightly lower rate for 20+ years, that would save you money over time. Once your policy is issued, your rate is locked in for your whole life or the duration of your term. If you are older than 50 years of age, the monthly savings are even greater since costs rise faster for older people.
To illustrate, let’s look at an example:
I have a client who is a 33 year old female. Her birthday is September 1, 1977. We expect her health rating to be “Preferred” for a $1,000,000 Twenty-year Term Plan. My estimate is that the premium will be $720/year or $62/month.
But when we run the insurance illustration on June 1, 2011 (three months before her actual 34th birthday), the software says that she is 34 years old. That’s because according to the company, her “insurance age” went up six months before her actual chronological birthday. The premium for a 34 year old woman in this case is $780/year or $67/month – an increase of $60/year or $5/month.
We can backdate the application paperwork (by making a note in the appropriate section) and lock in her insurance age of 33 for the full duration of the term. That will save her $1200 over the life of the policy.
But there’s a cost to using this technique: You have to pay upfront all the monthly premiums back to the age change date. In this case if we write the application on June 1, 2011, we have to backdate it by three months to lock in her insurance age of 33. A back premium of $186 ($62 x 3) would be required at the time of application or at delivery. Basically you are paying $186 to save $1200. It will take about 37 months (at $5/month) to break even using this technique.
This technique works best with longer term life insurance plans, and especially Whole Life Insurance policies. With a Whole Life plan, the savings would be $ 34/month ($822 vs. $856) and the policy would be eligible for dividends three months sooner.
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