Until about the age of 21 or so it seems must of us try to do our best to seem older than we really are. Then a funny thing happens. All the effort that went into looking older begins to gradually shift to trying to seem younger. Unfortunately, most life insurance carriers are fighting against us in this regard. It is a common practice for life insurers to base your insurance age on your nearest birthday, as opposed to your last birthday. So, while you may consider your self to be a certain age, say 52 years old, if you are within 6 months of your next birthday, most life insurance carriers will consider you to be age 53 for pricing purposes. This 6-month mark is know as a half birthday.
It is not uncommon for a consumer to begin the process of shopping for life insurance prior to his/her half birthday, but for one reason or another does not apply until after the half birthday has past, only to be surprised that the quote price has increased.
The reason for the practice of pricing life insurance based on your nearest birthday, is that it provides more accurate risk management for the life insurance companies. This more accurate risk management is a result of the fact that the actuarial methods used to price life insurance are based on the life expectancy of an individual at any given birthday. So, by considering a consumer to be age 53, when they are still 4 months from their 53rd birthday, actually allows for slightly more accurate mortality forecasts, then it would to consider the individual to be age 52.
To be clear, the age assignment still holds for 12 months since it is good from one half birthday to the next. Regardless, many consumers are not aware of this age classification method and often times can’t help but feel cheated because the are being assigned the rates for someone who is “older”. As a result the industry provides some options for consumers to help counteract the increase in premiums that result from this practice.
The first option is carrier choice. While it is much more common for Life Insurance companies to apply nearest birthday pricing than last birthday pricing, there are a handful of carriers out there who have decided to implement last birthday pricing, meaning they don’t consider your age to change until you actually reach your next birthday. Although last birthday pricing may slightly reduce the accuracy of mortality projections (the companies compensate for this by adjusting there actuarial formulas), these carriers often benefit by having more competitive pricing for individuals who are shopping for life insurance within six months of thier next birthday. As always, it is best to work with an Independent Life Insurance Broker, to help determine which carrier will give you the best pricing based on your date of birth and other factors.
Secondly, most life insurance carriers allow for a consumer practice known as backdating. Backdating a policy means that even though you may have applied after a particular date, say your half birthday, you can backdate the policy by having it issued with a date in the past, i.e. prior to your half birthday. The reason for backdating, of course, is to have the policy issued at a lower premium, based on a younger age classification. The trade off with backdating is that you must pay for the time between the date on the policy and when the coverage actually became effective. Considering that many carriers allow you to backdate anywhere from 3 to 6 months into the past, you have to weigh the cost of paying for a period in which you did not actually have coverage vs. the savings you will realize over the life of the policy by paying a lower premium.
While the Life Insurance industry does provide company choice and backdating as ways to mitigate the impact of nearest birthday pricing, the best way to avoid paying a higher than necessary premium is to be as proactive as possible about purchasing life insurance once you have decided it is something you need. Far too often life insurance consumers will begin the process of shopping for life insurance and then put it on the back burner because they can’t make a decision or just have other things to attend to which take higher priority. This procrastination often results in a change in age classification, or even a detrimental change in health status, both of which lead to paying a lot more money for life insurance coverage over the life of the policy.