Buying life insurance doesn’t mean it’s immediately effective. Each policy has different requirements and timelines when the insurance becomes effective.
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Understanding the effective date of a life insurance policy should play an essential role in deciding which policy is right for you.
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What is Life Insurance?
Life insurance is a contract between you (the buyer) and the insurance company. The insurance company promises to pay your death benefit when you die of covered causes in exchange for the monthly premiums you pay.
There are different types of life insurance, some that go into effect immediately and others that have a longer effective date.
Types of Life Insurance
As a senior, you have several options for life insurance, but typically not term life insurance. Term life is a policy that’s good for a specific term, such as 30 years. Unfortunately, many insurance companies stop term life at age 55, and those that don’t only allow it in shorter terms.
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Other options for life insurance include:
- Final expense insurance – This policy covers your final expenses, such as your funeral, medical expenses, and burial costs.
- Guaranteed issue life insurance – This policy is guaranteed for anyone with no medical exam. However, the premiums are higher, and it has a longer waiting period before the policy becomes effective.
- Simplified issue life insurance – This policy doesn’t require a medical exam but requires a medical questionnaire that you must answer honestly to get approved. The premiums aren’t as high as the guaranteed issue, but it typically has the same waiting period.
What is the Effective Date?
The effective date of your insurance policy is the date coverage begins. It’s not the date you apply for coverage. Instead, you must wait until the underwriter assesses your application and approves you for coverage. Then, they will issue the policy with the coverage date.
If you die after the coverage date but before your insurance expires, your beneficiaries may receive your death benefit. No one gets the death benefit if you die before the effective date or after expiration.
Understanding the 2-Year Waiting Period
Some policies have a 2-year waiting period, such as guaranteed issue and simplified issue policies. These policies have two dates – an effective date and a date the waiting period ends.
If you die between the effective date and the waiting period end date, your beneficiaries will only receive the premiums you paid plus a percentage, usually around 10%.
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Insurance companies require this waiting period to prevent anyone from buying life insurance with no medical exam right before they die. This would leave insurance companies on the hook for large death benefits when they received very few premiums.
What is the Contestability Period?
Some insurance policies have a contestability period. If your policy has one, it will be in agreement. This doesn’t apply to guaranteed issues or simplified issue policies.
The contestability period lasts one to two years after the effective date. It allows insurance companies to investigate your death to determine if you were in poor health when you took the policy.
The insurance company looks for any signs of lying or fraudulent activity when you apply for the insurance policy. They can deny your death benefits if they find anything of the sort.
When Does a Policy Expire?
Not all life insurance policies expire. Term life insurance policies are the most common to have an end date. For example, if you took out a 20-year term policy in 1985, it would expire in 2005.
However, most life insurance policies for seniors don’t expire because they are permanent life insurance policies. They are meant to last your lifetime; however, if you don’t pay your premiums, the policy will expire, and you won’t get any money back.
Can a Life Insurance Policy be Backdated?
Few life insurance companies backdate insurance policies, but some factors must be considered.
If you backdate a policy, it’s usually to get the premiums of your younger age. However, most companies will backdate up to six months, so if you had a birthday in the last six months, you might want the premiums of your lower age, especially if you hit a milestone age this year.
There’s one catch, though. If you backdate a policy, you must pay upfront the premiums you didn’t pay for the backdated period. So before backdating, make sure it makes financial sense to do so and that you’re saving enough money to warrant spending the lump sum upfront.
Final Thoughts
Your policy’s effective date is the most important date on your insurance policy. If a policy isn’t in effect and you die, your loved ones won’t receive your death benefit. Ask your life insurance agent about your policy’s details, including the effective date, issue date, and waiting period, to ensure you understand.
