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Yesterday the insurance brokerage that wrote my current term policy 2 years ago contacted me to see if I would like to replace the policy. Obviously they want to generate a new commission by churning my existing policy.

We talked about them writing a new 20-year term to replace the 18 years left on my current policy, which has a premium of about $129/month.

The agent suggested that if I can "act quickly" and get the application started he will be able to back date the application to November.

Because my birthday is in May, having the application dated in November would put the application date closer to my last birthday than my next birthday, which would drop the premium from $145/month to $126/month. If issued, I would be responsible to paying the premiums for the those months at the issuance of the policy, but I would obviously save over the lifetime of the policy.

Is this ethical and an accepted practice in the industry? Or does this indicate a shady operator that I might not want to do business with? I am not concerned about the company actually backing the policy, but the independent broker.

  • It would seem to me that if you want to extend your coverage period by two years and if the cost per month will drop by $3 then it's a good idea. And even if they get a larger commission by churning your current policy, what difference does that make if it's not coming out of your pocket? I have no idea if this is ethical and accepted practice but you might feel more comfortable if you heard it from insurance company. – Bob Baerker Jan 16 at 1:10
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    If you're happy with your current coverage, I wouldn't bother. You could probably save more than $3/month just by looking at things like your monthly grocery purchases. – chepner Jan 16 at 14:38
  • @chepner, I agree the $3/month is not an issue, less than 2% savings. – spuck Jan 16 at 15:57
  • @BobBaerker, thanks for the feedback. You're right: I shouldn't care if the broker gets a commission or not. The only other factor I might consider is comparing the strength (rating) of the issuers of both my current and proposed policy. – spuck Jan 16 at 15:59
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    @spuck - Assuming that ratings of the two insurers are comparable, for me the core issue would be whether I wanted to extend the coverage at today's rates rather than those of 18 years from now. If you don't want/need the extra two years, do nothing. If unsure, extend the policy. You can always default on the new 20 year policy in 18 years if you are financially secure, effectively being right where you are now. – Bob Baerker Jan 16 at 16:11
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This is legal, but keep in mind you're paying for 2 months you didn't need and taking 2 months off of the end date. It's like buying points on a mortgage where you pay interest up front in exchange for a lower rate going forward.

To find the break-even time, divide the amount you pay upfront by the monthly savings in premium. It will take that many months before you're "ahead".

I agree with the others that if you already have term insurance there's no need cancelling it for a new policy. If you need to increase the coverage then just get a new additional policy.

  • A good point about taking 2 months off the end date. If I leave my current policy in force my coverage would end June 2038. If they backdate a new policy for a new 20-year term that would get me to Nov 2039. – spuck Jan 16 at 15:54
  • One thing to consider is will you still need life insurance in 2038? Meaning will you still have dependents that rely on your income? Since you already have insurance in place I'd be hesitant to change it just to save $3 a month now and add 17 months to the end. You could invest/save the upfront cost as part of a plan to self-insure (have lots of savings) instead. – D Stanley Jan 16 at 15:58
  • Another excellent point. If all goes according to plan, I (or my widow :) ) should be self-insured either way by 2038, and our youngest child will be 20 by then, so the need for income replacement should be gone. That was my original thinking when shopping for my current policy in 2018. – spuck Jan 16 at 16:02
  • If the cost for the policy is currently $129 a month and the new policy would become $126 per month, what upfront costs would occur here? And as I mentioned above, if so inclined, you could default on the new policy 18 years from now and there would be no harm, no foul. – Bob Baerker Jan 16 at 16:16
  • Backdating a policy involves an upfront payment for the months that have passed since the backdated date. So if you backdate a policy 5 months you pay for those 5 months upfront. In the OP's case it would be 2 months, or $252. – D Stanley Jan 16 at 16:18
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The early years of a term policy with level premiums you overpay, and then the last few years you underpay. This keeps the premium the same for the 10-20 years of a term policy.

They have proposed to you that after overpaying for two years, they want you to trash that policy and start over. Not only do they generate a new commission, they get you to pay for months you didn't need. Alarm bells should be going off.

I would need a simple explanation with proof as to why the proposal makes sense, before even considering the offer.

I think they are back dating it so that the final year of the policy doesn't enter the next age bracket which would make it very expensive.

  • I agree, the broker wants to generate a new commission. The benefit to backdating for me would be a lower premium each month/year than it would be if the policy was in my current age bracket. – spuck Jan 15 at 22:47

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