HOW YOUR REAL AGE AND INSURANCE AGE DIFFER

"I'm almost 14."

That's what our son said when he was almost six. We were on vacation and he wanted to watch Small Soldiers on HBO.

Parents measure a baby's age in hours, days, weeks and then months. 

Children measure age differently. Mere days after your 4th birthday, your 5th feels very far away. School and other "big kid" stuff looks alluring. So your age is 4 years and 3 months, then 4 1/2, then "almost 5".

Later, we measure our age in years and milestones like the "big 4-0".

Dennis The Menace once said  that once you're "over the hill", life picks up speed. Some retirees say time moves faster. As a nonretiree, I find that hard to believe. If every day feels like Saturday, maybe a week passes overnight?

40 or 41?

Suppose you turned 40 on January 1. How old are you in March, June, September and December?
You'd probably round down and say 40. We age every day but give of our age as of our last birthday. Maybe this is a psychological trick to  help us feel younger. Maybe it's just simpler.

What works in real life doesn't work for insurance. If you're 40.01, do you want to pay the same premiums as someone who's 40.99? That means you're subsidizing the older ones. Similarly, if you're a nonsmoker, you don't want your premium rates blended with smokers. If you're healthy, you'd want credit too.

To be fair overall, insurers usually base your premium on your age as of your nearest birthday. That means an insurance age of 40 covers a range from 39.51 to 40.49 years from birth. The calculations are done via computer algorithms. You needn't worry about them.

41 or 40?

Confusion may arise when you look at your age on insurance projections (often called "illustrations"). The output might show your age at the time of purchase (say 40) or at the end of the first policy year (say 41).

Practices vary by company. The projection may only show the policy year (starting at 1). These differences means you'll need to pay attention — especially if comparing proposals from different companies or different advisors. If you want to compare projections on your 65th birthday, the output might show 65 or 66.

Backdating

Using our example of you turning 40 on January 1, what happens if your insurance takes effect on August 2? Your nearest birthday is the next January, which means you pay premiums as if you're 41. That may not feel fair.

Companies will often let start coverage a few months earlier, say June 2. You'd pay the premiums for June and July for this option. This process is called "backdating" and lets you "save age".

40 or 44?

Insurers really want to estimate your biological age.

So an unhealthy 40 year old may get "rated" and pay the premium rates for a healthy 44 year old. Insurance ratings are much like the surcharges that banks add if your credit rating is shaky.

In the future, age might get calculated daily. So the longer you wait, the older you get and the more you pay.

Links

1. How Pink Floyd's insights on mortality help you
2. Iron Man didn't save Leslie Bibb but another superhero did
3. How advisors really prepare term life insurance proposals
4. Your life expectancy exceeds 1,000,000,000 seconds
5. The high cost of Joint First To Die (JFTD) life insurance
6. image courtesy of Gabriella Fabbri (Italy)

Podcast Episode 84 (4:15)

direct download | Internet Archive page

PS We relented and all watched Small Soldiers. After all, ages 6 and 14 are so close to each other.