When you should backdate policies

Comes at a cost but can be used to adjust premium payment term with fund flow

The tax season will end in a week. And, usually, we are in a hurry to get done with our tax-saving investment before the month of March ends. If you were born in February or March (when this rush for tax-saving investment is high), you may find life insurance an expensive proposition, especially if you are in a high age bracket. But you can still buy the same policy at a lower premium.

How? By a backdated life insurance policy. Backdating refers to the practice of predating the time at which a policy is bought, but it can be availed of only once.

This is how it works: While you will continue to be 54 years old even six months of your birthday, an insurance company will conveniently levy premiums for a 55-year-old. By backdating your policy by six months, you can effectively reduce your total premium contribution. So, if your birthday falls in March, you can backdate your policy to, say, July or August of the previous calendar year.

“Premium contributions are, among others, a function of age. The older you grow, the higher the premium.  Insurance companies determine premium rates on the basis of the ‘age nearer the last birthday’,” says G N Agarwal, chief actuary at Future Generali Life Insurance. A policy can be backdated only within a financial year, he adds.

Insurance brokers say sometimes companies agree to overlook the financial year rule. For instance, if you aren’t able to finish your tax-saving investment by March, you can do so in April (or May or June) of the next financial year and backdate the policy to February or March of the previous financial year.

“There is no big benefit of doing this because there is no benefit of cover in such cases between, say, February/March and April/May/June even though you have to pay a higher price for it,” says Deepak Yohannan of MyInsuranceclub.com.

Backdating of insurance policies comes at a cost of 10 per cent interest charged on the first premium. Taking the example used above, a Rs 50 lakh term plan for a 55-year old for 15 years would cost anywhere between Rs 23,000 and Rs 46,000 annually (including term plans), according to Policybazaar.com.

In comparison, a 54-year old will have to pay anywhere between Rs 21,000 and Rs 42,500 (including term plans) for the same policy. Taking the interest cost, it will be between Rs 23,100 and Rs 44,600, same as that of a 55-year old, but only in the first year. This method can also be helpful for those who are self-employed or work freelance — for instance, if such an individual buys life insurance in January but gets more business in September and wants his future premiums to be dated to September. It also reduces the policy's effective term. For instance, if a 20-year term life cover bought on January 1, 2014, is backdated to April 1, 2013, the policy would mature on April 1, 2033, instead of January 1, 2034.  

In endowment policies, this could be an advantage, as survival benefits accrue earlier. In a term assurance policy, however, the effective coverage period is lost to the extent the policy is backdated, though you still pay premium on the entire term. It is not advisable to backdate unit-linked plans because backdating the fund unit price for investment is a challenge.