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Backdating life insurance policy


“Backdating” is a concept of changing policy start date to earlier date than current date during policy inception. This is allowed with most of the insurers along with LIC. This was not illegal. Take auto insurance, for example: if you backdate your car insurance policy so that it says you were covered for an accident you had the month before you actually bought the policy, you’ll be committing fraud. You do not want to backdate your auto insurance policy.

Life insurance is different because by making your policy retroactive by a short period, the insurer isn’t taking on any more risk. It’s unlikely that you actually died last month and are faking being alive today so you can cash in on a death benefit.

Backdating the policy has its own benefits.

1.     The policy will mature earlier than normal policy.

2.     Tax savings can be covered without paying lump-sum amounts. Moreover the backdating charges will be nominal in nature.

We will understand backdating using simple illustration:

Consider, Mr. Ramesh wants to take LIC New endowment plan in Dec 2016.He is looking for investment plan, which can also give tax savings. LIC New Endowment plan would be best fit according to his requirement.

Consider the below details.
Sum Assured: Rs. 10Lacs
Policy term: 20 years
Monthly premium: Rs. 4200

If he purchases plan without backdating, he can get Tax exemption for 4 months (December-March) for Rs. 16,800 (Rs.4,200*4).

Now, if he backdates policy till April 2016.He can get tax exemption for Rs. 50,000(Rs.4,200 * 12).

Remember that backdating can be done only till start of current financial year (i.e. April). For backdating till April 2016, Ramesh needs to Pay last 8 months due as one-time payment with nominal backdating charges and resume the policy in his preferred payment mode either monthly, yearly, half-yearly or annually.

By backdating the policy, he will save the tax and policy will get matured in April 2036 rather December 2036. By this the bonus amount added will also be higher compared to normal policy.

LIC and most of the insurers have standard procedures and nominal charges for backdating, Most of the insurers encourage customers especially, during last quarter (Jan-Mar), which constitutes of majorly tax planning customers.