Current Date or Save the Age When Applying for an Insurance Policy
When applying for Life insurance, critical illness or disability insurance, life insurance companies will date the insured closest to their next birthday.
Example, a client, let’s say named Bill is currently aged 39 and applies for life insurance and a separate critical illness insurance policy on Jan 15, 2020. Bill celebrates his 40th birthday later that month on January 29, 2020. Although Bill is currently 39, the insurance broker will typically quote Bill based on a male, aged 40. The reason behind this is insurance companies date applicants closest to their next birthday. At the same time had Bill had his insurance policy in force by July 28, 2019 (6 months and 1 day prior to his next birthday) the insurance company would consider him at a 39 year old rate.
Application Date vs Policy Issue Date
Had Bill applied for insurance on July 28, 2019 it would not necessarily mean he would be quoted as a 39 year old. The reason being is the application date (date insurance policy is applied for) can be different than the issue date (date the insurance policy is put in force). It is possible that Bill could have applied and been approved on same day through a quick issue insurance policy, however generally speaking once an insurance policy is applied for it can take a few days to upto a few months (depending on underwriting requirements) for policy to be issued.
Save the Age or Current Date
Although Bill may have a policy issued within the 6 month period closest to his next birthday the life insurance company will allow Bill to “save the age” or back date the policy to be 6 months and 1 day prior to his next birthday. What that mean is let’s suppose the life insurance policy Bill applies for on Jan 15, 2020 is approved just a couple days later on Jan 17, 2020. In order to “save the age” and be quoted as a 39 year old Bill would ask his insurance broker to advise the company to issue the policy based on 6 months and 1 day prior to his next birthday (or July 28, 2019). However that would require Bill to pay for premiums effective July 28, 2019 (or approx 6 months of premiums during a time he did not have coverage). The question would does this make sense to do?
When to Save the Age
Typically it makes sense to “current date” insurance policies, especially where there is several months of back premiums potentially due. A caveat to this rule is when there is a relatively nominal period to back date, for example if Bill was issued a policy Aug 1, 2019 it may make sense to have the insurance company back date a few days to conserve his age.
Another instance it may make sense to save the age would be where long term the numbers justified. Let’s supposed both the life insurance and critical illness insurance policies for Bill were issued Jan 28, 2020 (1 day before his 40th birthday). In order for him to be quoted as a 39 year old he would require policy be issued as of July 28, 2019. Would it make sense for Bill to pay 6 months of premium? This would be dependent on the premium difference between being aged as a 39 year old vs 40 year old and how long the policy was in place.
Let’s suppose on the life insurance policy, Bill chose a level cost universal life insurance policy with premiums due to age 100 for 100K of face amount of coverage.
- Cost as a 39 year old is $82.60/month
- Cost as a 40 year old is $85.28/month
- Back dated premiums due are $82.60 x 6 months = $495.60
- Savings monthly for life is $85.28 – $82.60 = $2.68/month
- Cross over for when savings realized (not considering opportunity cost on back dated premium) is $495.60/$2.68 = 184.93 months or 15.41 years after which it made sense to back date.
At the same time let’s suppose Bill applied for a 10 year term critical illness insurance policy for 25K of face coverage.
- Cost as a 39 year old is $12.38/month
- Cost as a 40 year old is $12.87/month
- Back dated premiums due are $12.38 x 6 months = $74.28
- Savings monthly for 10 year term is $12.87 – $12.38 = $0.49/month
- Cross over for when savings realized (not considering opportunity cost on back dated premium) is $74.28/$0.49 = 151.59 months or 12.63 years (beyond the 10 year term)
In this example it might make sense for Bill to back date or save the age on his life insurance policy, but would definitely make sense to current date his critical illness insurance policy. Every circumstance is different and there are times where long term the numbers might make sense but in practical terms paying for back dated premiums is not a viable solution.
We would be happy to provide further analysis for your family’s specific circumstances. Contact Protect Your Wealth today to learn more!
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