Want to start late and finish first?
So as the name suggests, Backdating is the idea or concept of putting your start date of the policy to the earlier date during policy inception. This was not illegal since this was allowed with most of the insurers along with LIC. For example, if you take motor insurance and you backdate your car insurance policy. It would appear that the accident cover had made before even you bought your insurance. In this case, you will be committing a fraud. So, you should never backdate your motor insurances.
backdating life insurances would be making retroactive your policy by a short period and the insurers will not take any more risks. It is like you fake a death and actually be alive and get benefitted on the death.
What are the benefits of backdating your policy?
- The policy will mature earlier than normal policy.
- Tax savings can be covered without paying lump-sum amounts. Moreover the backdating charges will be nominal in nature.
Understand backdating using simple illustration:
Consider if a person wants to take LIC New endowment plan in Dec 2021. 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 2021.He can get tax exemption for Rs. 50,000(Rs.4,200 * 12).
Remember that backdating can only be done from start of current financial year (i.e. April). For backdating till April 2021, The person 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, the person 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.