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Explaining the Concept of Backdating in Insurance

Many of us dream of time traveling, either to change our past or foresee our future especially when viewing life from a financial perspective. We generally ponder on our past financial decisions like, “Had I invested in ‘X’ stock five years back, I would have earned substantial returns by now.”

However, the life insurance policyholders can stay delighted as they have the power to turn the clock back and change the start date of their policy to an earlier date. This common practice in life insurance companies is known as ‘Backdating’. 

Backdating means altering the start date of the life insurance policy to a timeline earlier than when the document was originally bought. Suppose you bought a policy on 5th August 2013 but end up realizing later; had you purchased the policy two months earlier, you could have got it at better premium rates. Backdating allows you this liberty. You can request your insurer to change the official start date to 4th June 2013. This back-date policy will reduce the premium liability for the insured during the policy tenure.

Let’s look at some advantages of backdating insurance policy.

Backdating provides you the option of paying lower premium by altering the policy start date and selecting the one which gives you better premium rates. For example, if a person who is going to be 40 years old after two months, applies for a life insurance policy at present; the insurer will consider his age as 41 years as per the norms. In such a situation, if he backdates his policy to 6 months earlier, then he would be considered getting that policy at an age of 40. Eventually, he would not be required to pay a higher premium. Though the difference in the premium amount seems to be minimal but it proves quite beneficial in the long run.

Throughout the year, all of us look to invest in tax saving tools and one of the most preferred options is a life insurance policy. Backdating comes very useful if you are one of those taxpayers who are looking to buy a life insurance policy to exhaust the section 80C limit on this year and start paying the premium on a monthly/quarterly basis from the next year. In such a case, the policyholder can pay the premiums for the current financial year at one go, whereas, for the coming year he can deposit the premiums on the due date, set by his insurer.
Many of us believe in purchasing important things on significant days like birthday, wedding anniversary and so forth. Backdating comes handy as one can anytime alter the official date to some important date during the year. It also acts as a reminder for premium payment of your life insurance policy. And even if you forget, surely your family members can remind you of the same. Backdating also takes care that the maturity date coincides with this significant date.

There are specific professions whereby the flow of income is not uniform throughout the year. Rather, the income goes up and down at the peak season and off season, respectively. In such a scenario, if an individual incidentally of accidently buys his policy in his off season then he can get the policy backdated to the period of his maximum earnings. For instance, tourist guides have the highest earning during the vacation period (i.e. May-June, December-January), so he can get the policy he bought in his off season, backdated to some date in the aforementioned vacation season.

Who does not love to get return of investment at the earliest? Backdating is the shortcut for this process. In case of money-back plans, if you backdate the start date of the policy then you are sure to get your first tranche earlier. Take for example, if you purchase a money-back plan today then your expected 20% of sum assured will be offered to you after
5 years i.e. in 2019. In contrast, if you backdate the policy to 2013, then your first return will reach you in 2018.

Backdating directly affects the premium rate; hence it should be opted by people who are planning to purchase a policy at an older age. Generally, most of the insurers hike the premium rates for the policyholders above 40 or 45 years because at this age an individual is more prone to diseases. Backdating might not prove much useful for person aged 25 or 26 as the premium amount for these two age groups does not have much difference. But the difference becomes substantial for individuals purchasing policy at an age of 40 and above.
If you have opted for backdating, you must ensure to move into the previous age bracket, even if by one day. Suppose you are falling in a senior premium slab just by a month’s time, then backdate the policy only by a month and avail the last premium rates. This will ensure that you don’t end up paying a higher backdating interest.

An important thing to note here is that backdating works in the favor of policyholders in endowment and money-back plans but in case of term insurance plans, it is quite the opposite. Here’s how!
In case of endowment plan, the survival benefits accumulate much earlier. Whereas, with term insurance plan the coverage tenure for the backdated period goes waste although an individual is required to pay the defined premium for the term. Generally, the insurance companies play the ‘zero sum game’ where they lure the buyers with the back-dating feature. The insurer increases the premium rate depending upon the age of the policyholder. Tempted by the lower rates, the buyer opts for backdating and ends up paying extra premium for the back-dated period which totally goes waste.

So, before going for backdating, one has to make sure that the total savings in premiums over the life of the policy is more than the extra premium paid for the backdated period.

The unit-linked plans depend on the market hence it is not advised to backdate the fund unit price as one might land up having losses.