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Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us. Insurance agents almost always recommend that backdating be done without any analysis that would advise prospective insurance buyers of the potential advantages and disadvantages. Generally, a prospective insured with, say, a February 15, 1945 birthdate will become 60 for insurance purposes on August 16, 2004. That is, most insurance companies use nearest age instead of actual age. A life insurance policy purchased on November 15, 2004 will be based on an issue age of 60. But policies can be backdated up to six months to save the prior age. Therefore a policy that is made available for purchase November 15 can be backdated to August 15 to save age 59. Insurance agents almost always recommend that backdating be done without any analysis that would advise prospective insurance buyers of the potential advantages and disadvantages. Failing to obtain such an analysis isn't prudent as the following case study will demonstrate. This is especially important for independent trustees. In 1999 Ruth's trust acquired a $10,000,000 life insurance policy on her life. Her date-of-birth is January 8, 1943. The policy was issued November 8 and without discussion or analysis the agent informed Ruth and her trust that the policy was being backdated to July 8, saving her age as 56. This represents backdating of four months, or one-third of the year. The policy's contract premiums are $232,400 for age 56 and $243,900 for age 57. Because of backdating the next $232,400 premium is due July 8, eight months after the first premium payment. Ruth's trust is paying for four months of insurance coverage it didn't actually have. This has a cost of $77,467 (contract premiums of $232,400 divided by three, the one-third of the year there was no coverage although paid for). But, this $77,467 cost is recovered at the rate of $11,500 a year, which is the difference in the age 56 and age 57 premiums ($243,900 minus $232,400). Using a discount factor of 5% it takes eight years for the backdating cost of $77,467 to be recovered via lower premiums. The slick agent in this case found a reason to replace this policy with a new one three years later. Lost in the shuffle was the backdating that had only three years of recovery before this policy was terminated. Because the backdated policy was replaced three years later the trust suffered a loss of about $44,500 at the time of replacement in 2002. This case is in litigation for other more serious alleged misrepresentation and nondisclosures, but one of the compensatory damage claims is recovery of the $44,500. The agent may have avoided this by disclosing the facts and asking the trust to decide whether to backdate or not. The trustee in this case is Ruth's daughter. They didn't use an independent corporate trustee. If they had the corporate trustee may have been named a defendant, in part because of losses suffered due to backdating. The eight years before backdating is economical
isn't a problem for an agent and independent trustee if Ruth were to die
during this period because the probabilities are strongly against this
occurring removing any claim of malfeasance. But there is a remarkably
high incidence of permanent life insurance policies being terminated during
the first five years after purchase. Generally, policies are terminated
at a 3% to 5% annual rate during this period. I have written in the past
about paying attention to a policy's surrender charges in connection with
early policy termination. Backdating costs and the time it takes to
recover them should also be considered.
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