Actual Age vs. Nearest Age in Life Insurance
Many consumers are unaware that most insurance companies use your “nearest age” rather than actual age to calculate your age and premium on a life insurance policy. Let’s take an example. Today is 7/15/2011. Let’s say you are 60 years old, and you turned 60 back in the beginning of January. So your birthday is Jan. 1st, 1951. Well, your actual age may be 60, but for insurance purposes, you are 61, because you are over 6 months past your birthday, so you are actually closer to 61 than 60. And that’s how nearest age is calculated… for 6 months after your birthday, your nearest age matches your actual age, but if your birthday was over 6 months ago, your nearest age is one year older for insurance purposes.
How Age Affects Your Life Insurance Premiums
Simply put, if you are applying for coverage, every year you wait to purchase life insurance, your premium increases. Let’s take my example from above. If my client is a male, rated Preferred, here’s the difference between the 60 and 61 year old rates.
Age 60 – 20 year term, $500,000 policy from Genworth – $2,994 per year
Age 61 – 20 year term, $500,000 policy from Genworth – $3,400 per year
As you can see, having a birthday can cost you a lot of money in life insurance premiums. The premium jumps 14% from age 60 to 61. Over the life of the 20 year term policy, a 61 year old policy holder from my example above will pay $8,120 more than the 60 year old.
Backdating to Save Age in Life Insurance… and Save Money
Fortunately, life insurance companies let you backdate your policy to lock in a premium at a certain age. In the example above, my 60 year old turned 60 on January 1st. That means his insurance birthday would be six months later on July 1st. So if we just request the policy date to be June 30, he will still be nearest age 60. Insurance policy backdating is a very common trick used to keep premiums down. The only catch is that if you date the policy June 30th, you have to pay premiums from that date. So my client would have to pay for a couple weeks of insurance when he wasn’t technically being covered. It’s not uncommon to backdate two, three, or even four months to save age. If it means you have to cough up a few months of premium up front to put the policy in force, it will still make sense if you’re going to save 14% per year thereafter. You’ll typically break even within two to four years, and will be saving thereafter.
How to Calculate my Break-even Point
Take the total amount of backdated premiums you have to pay to put the policy in force. Let’s say in my example above, my 60 year old has to pay two months premiums ($249.50 X 2 = $499). Then look at the difference between the annual payment without backdating ($3,400) and with backdating ($2,994), which is $406. So in this case, my client would have to pay $499 up front, but then would be saving $406 per year for 20 years to do so. You can see he’ll break even in the beginning of his second year of payments.
Planning for Your Insurance Birthday
If you are looking into purchasing life insurance, and you just had a birthday within the last couple months, there’s no real concern about policy dating and having an insurance birthday, in most cases. But if you had a birthday four to five months ago, you need to apply right away for coverage. Hopefully, you can get your policy in force before your insurance birthday to avoid paying higher premiums. If not, you’ll be forced to backdate the policy and come up with extra cash to put the policy in force.
How Much Will I Save if I Backdate?
It depends on your age. If you are in your twenties or thirties, having a birthday may only increase your premium by a few percent. But if you are in your fifties or older, having a birthday increases your premiums by 10% or more, in most cases. You’ll almost always want to backdate if you can save 10% over the life of your policy.
Who Should Backdate?
If you plan on keeping your policy for more than 4 years, it almost always makes sense to backpay up to 4 months premiums. Also, as mentioned, the savings are more substantial the older you are, so applicants over 40 will see greater savings for backdating than applicants below 40. In some cases, my clients have a health issue they want to clear up, or want to quit smoking, and plan to re-apply in a year or so. They may not be the best candidates to backdate a policy, since they won’t hold the policy long enough to break even.
Real Life Insurance Backdating Example – Your Premium Could Be Either X or Y…
Recently a client of mine was approved for life insurance where we had the opportunity to backdate. My client is 64, but turned 65 (insurance birthday) on 6/7/11. Here’s the email I wrote him:
I know we spoke briefly last week about your Genworth approval, and I just tried calling you again at home, and left a message for you with your daughter. Congratulations again for being approved at their best rating!
Now we need to discuss if you are going to take the full 20 year term, $500,000 policy, or some lesser amount.
As you were approved, your monthly premium is $370.54. However, in order to get this rate, we will need to date your policy and pay premiums from an effective date of 6-6-11, so we can lock in your 64 year old rate. I know you are not 65 yet, but for insurance purposes, you actually turned 65 on 6/7/11, since Genworth uses nearest age rather than actual age. To avoid paying a higher, 65 year old premium, we can backdate the policy to 6/6/11, but you’ll need to pay two months premium to put the policy in force (6/6 to 7/5 and 7/6 to 8/5). If you don’t want to backdate the policy to save age 64, you can pay $425.93 per month, which is the age 65 rate.
Can I have them issue the policy for the full 500K, 20 year, or would you like to see quotes for lower amounts?”
*Written by Chris Huntley. Huntley Wealth Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.