Wouldn’t be great if you could revisit your past to correct all those financial mistakes that you had made? Life insurance policyholders can heave a sigh of relief as they have the power to turn the clock back to enjoy benefits of purchasing a policy at a young age. This is called backdating. Backdating is possible only in endowment and money-back policies. Let’s understand what it entails.
What is backdating?
In simpler terms, backdating means changing the start date of the policy to an earlier one. For example, you bought a life insurance policy on 1st June, 2013 but later you think that the policy would have generated better returns if you had bought it in April 2013. You and your insurance company agree to change the policy to officially start it from April, 2013. In this case, you have backdated the policy. Usually, no interest is charged if the policy is backdated by less than a month or before September
Advantages of backdating
Backdating gives you the following benefits:-
Low premium vis-à-vis age:- While issuing the policy, insurers consider the most nearest age of the policyholder. It means if you are 32 years and 7 months old, the insurer will consider your age as 33 years. This nearest age may put you in a higher premium slab. However, if you backdate the policy by 2 months, the insurer will consider your age as 32 years and 5 months only. Now you will be paying lower premiums based on a plan for a 32-year old.
Set the timing of payment:- There are specific professions where the income flow is not steady. In such a scenario if an individual accidently buys a life insurance policy in its off-season then the policy can be backdated to the period of maximum earnings. For instance, a farmer may have a seasonal income. He would prefer to make insurance payments only after he has received his crop proceedings. In this case, a farmer could backdate the policy to start it in the harvest season.
Change the date to coincide with special dates:- You can backdate the policy to coincide with your important dates, such as birthday and anniversary. It keeps easy for you to remember your premium due date.
Early maturity claims:- Backdating reduces the tenure of a policy and facilitates early maturity. For instance, if a 30-year life insurance cover bought on March 2000 is backdated to April 1999, the policy would mature on April, 2029 instead of March 2030. In case of endowment policies, this could be beneficial as maturity benefits accrue earlier.
When should you avoid backdating?
You should avoid backdating in the following situations:-
If you are young :- Backdating is not very useful for applicants falling in the age group of 20-25 years because there is no major change in premium. It should be opt by people who are buying life insurance at an older age. As insurers levy high premium rates on applicants above 40-year, backdating allows them to make some savings.
If you have shortage of funds:- To backdate the insurance policy, you need to pay the premium of the backdated period along with the interest charges. However, you should exercise this option only if you have sufficient funds.
If you have term insurance:- Backdating a term policy is a futile exercise because the coverage for the previous backdated period becomes irrelevant.
Before backdating a policy, evaluate carefully to ensure that the total savings in premium over the policy tenure is more than the extra premium paid for the backdated period.