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While it’s legal to purchase an insurance policy with a back date, remember that it may not always be beneficial for the buyer
Wouldn’t it be great if you could turn the clock back? You could make a lot of money by investing in the right stocks. While you can’t go back in time when it comes to stock investments, you can buy certain life insurance policies with a back date. Back-dating of a life insurance policy is a perfectly legal and standard practice in the insurance industry. So, the new plans launched by insurance companies in the past 1-2 months can be bought with any date in the financial year starting 1 April 2013.
Is back-dating useful?
Back-dating is useful in certain situations. A life insurance policy is not the best way to save tax and there are better, more flexible and lucrative options to do so. Even so, millions of taxpayers buy life insurance to save tax. If a taxpayer needs to exhaust his Section 80C limit through a life insurance policy this year but wants to pay the premium on a monthly or quarterly basis from next year, he will find back-dating useful. He can pay the premiums for this year at one go, and from next year, he can pay them whenever they are due.
It is also useful in case the buyer has just crossed the minimum age for buying a certain policy.
There are also sentimental reasons for back-dating. Sometimes, buyers want their insurance policies to be issued on an important date during the year. It could be a birthday, wedding anniversary or any other date with emotional value. This also ensures that the maturity of the policy coincides with that important date. It also sets a reminder for the premium.
Look before you leap
Going back in time also reduces the waiting period for the policyholder. If you buy a money-back policy in March 2014, you will get the first tranche (which is 20% of the sum assured) after five years in 2019. However, if you back-date the policy to April 2013, you will get the money in four years and one month, in April 2018.
Before you are led into believing that this is a great way to get your money back faster, do the math. The next premium becomes due in a month in April 2014. Also, you are charged a 10% interest on the premium you pay for the back-dated policy. “It makes little sense to pay 10% interest on a policy that earns you only 6-7%,” says a Delhi-based insurance expert.
If the back date is more than one month away, the buyer is charged a 10% annual interest on a pro-rata basis. So, if you want to back-date a policy by three months, be ready to pay an interest of 2.5%. The Anand Money Back package, a combo of two money-back plans and an endowment policy, being hawked by LIC agents, has one plan dating back to April 2013. The premium will be due next month.
Incidentally, the interest on the back-dating kicks in only after 30 September. Till this cut-off date, the LIC does not charge any interest even if the policy is back-dated by 5-6 months. There is also no charge if the back-dating is for less than a month.
Zero sum game
Insurance agents use back-dating to lure buyers. Insurance companies base their premiums on the policyholder’s age. LIC, for instance, goes by the last birthday of the buyer. If the policy dates back to before your birthday, the premium will be lower. However, this is a zero sum game. In your quest for a lower premium rate, you will end up paying extra premium. This is why back-dating works only in endowment and money-back plans. Back-dating a term plan is an exercise in futility because the coverage for the entire back-dated period effectively goes waste.
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