Credit Checks: Revealing Life Insurance Payments?

Life insurance companies are increasingly using credit checks as part of the application review process. While your credit score alone won't impact your life insurance premiums, your credit history can be used to calculate an insurance score, which may affect your application. Credit checks for life insurance are considered a soft pull, meaning they have no effect on your credit score.

Credit checks are used to speed up the application process

Credit checks are becoming increasingly common in the life insurance application process. While a credit check won't directly determine your life insurance premiums, it can speed up the application process and make it easier to get approved.

Credit checks are used to assess your financial risk to the insurance company. A credit check can indicate your level of financial responsibility and help predict the likelihood of future claims. This is done by looking at factors such as your payment history, outstanding debt, length of credit history, pursuit of new credit, and credit mix.

A good credit score indicates that you are likely a lower financial risk, while a bad credit score suggests you could be a higher-financial risk. However, it's important to note that your credit score is just one of many factors considered during the application process. Other factors, such as age, health, and lifestyle, also play a significant role in determining your life insurance premiums.

Additionally, life insurance companies typically perform a soft pull on your credit history, which does not affect your credit score. This means you can shop around for the best life insurance rates without worrying about multiple credit checks impacting your credit.

By using credit checks, insurance companies can automate and accelerate the underwriting process. This allows for quicker approval and can make it easier for more people to qualify for life insurance with lower premiums. Therefore, credit checks are a valuable tool for speeding up the application process and making life insurance more accessible.

Credit-based insurance scores are different from credit scores

Credit-based insurance scores and credit scores are calculated for different purposes and have different scoring factors and predicted outcomes.

Credit-based insurance scores are designed to predict the likelihood that you'll file insurance claims that cost the insurance company more than it collects in premiums. On the other hand, credit scores are created to predict the likelihood that someone will fall behind on their bills in the next 24 months. Credit scores are used by lenders to decide whether to approve applications and choose the account's terms.

Credit-based insurance scores and credit scores are calculated using similar underlying information from credit reports. However, the specific factors and weightings differ. Credit-based insurance scores are made up of five factors: payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. Credit scores, meanwhile, are grouped into the following five categories: payment history, credit utilisation, length of credit history, recent credit activity, and types of credit used.

The score ranges also differ between the two. Most credit scores range from 300 to 850, while credit-based insurance scores can have very different ranges, such as 200 to 997 for the LexisNexis Attract score.

Insurers must consider more than just the credit-based insurance score when setting premiums. State laws generally do not allow insurance companies to decline applications or set rates based solely on a credit-based insurance score. In contrast, creditors can decline credit applications or lower credit limits if an individual has a low credit score.

Credit-based insurance scores are not easily accessible. While you can obtain your credit score through various free services, you might not be able to get your credit-based insurance score, even if you ask your insurance agent.

Credit checks will not impact your credit score

When you apply for a new line of credit, such as a credit card or loan, the lender will likely perform a hard credit inquiry to determine your creditworthiness. These types of credit checks can lower your credit score by a few points and are recorded on your credit report.

However, credit checks for life insurance applications are considered soft inquiries and do not impact your credit score. A soft credit inquiry is like a background check and is often used to determine whether you can be pre-approved for credit. Soft inquiries are only visible on credit reports that you pull yourself and are not viewable by lenders or creditors.

While a credit check for life insurance will not affect your credit score, it is important to note that your credit history and credit-based insurance score are factors that life insurance companies consider when evaluating your application. Your credit-based insurance score is an internal metric used by insurers to assess your financial risk and can influence your premium rates or whether your application is accepted.

Credit history is one of many factors considered

Life insurance companies are increasingly using credit checks as part of the application review process. A credit check could help speed up the review and make it easier (and cheaper) to get life insurance if you have good credit. However, even if you have poor credit, your credit will only be one of many factors that the insurance company considers.

Credit scores help others – lenders and life insurance companies alike – to predict the risk of doing business with you. Credit scores range between 300 to 850. The higher the number, the better your credit score is. A good credit score means you are likely a lower financial risk customer, while a bad credit score means you could be a higher-financial risk customer.

Your credit-based insurance score is based on data such as the amount of credit utilised, the amount and types of accounts, the length of credit history, outstanding debt amounts, new applications for credit, and the types of credit in use.

While your credit score may not directly impact your life insurance application, the details of your financial history – like bankruptcy or large credit balances – will influence your insurance score. Your insurance score is an internal metric that the insurer uses to evaluate your overall financial risk.

If the insurer determines that you have a bad insurance score, you could pay more in premiums or, in some cases, have your application declined. Each insurer generates the score differently, and since it’s an internal metric, you can’t look up your insurance score like you can a credit score.

In addition to your insurance score, the insurer will consider your age, sex, and other personal details to evaluate your risk and set the premiums for your policy.

Life insurance companies want to determine the overall risk of insuring you – in other words, how likely you are to die while your policy is active. They will also consider your criminal records, LexisNexis risk scores, medical information, driving records, and prescription drug history.

In general, any indications of risk – whether medical or financial – can lead to higher premiums, while predictable health, finances, and hobbies will earn you more affordable rates.

Credit-based insurance scores are calculated differently

Here's a breakdown of the factors that go into a credit-based insurance score and how they are weighted:

• Payment history (40%): How you made payments on your debt, including frequency and the amount paid off.
• Outstanding debt (30%): The amount of debt you currently have.
• Credit history length (15%): How long you have had a line of credit.
• Pursuit of new credit (10%): Whether you have recently applied for new lines of credit.
• Credit mix (5%): The kinds of credit you have, including credit cards, mortgages, or auto loans.

It's important to note that these factors are similar for LexisNexis and FICO but may differ when it comes to weighting. Additionally, while your credit score ranges from 300 to 850, credit-based insurance scores can vary depending on the company providing the score. For example, LexisNexis offers credit-based insurance scores through Experian that range from 200 to 997.

When it comes to life insurance, a credit check will not hurt your credit score. It is considered a soft inquiry, which has no impact on your credit score. However, the information from your credit history can influence your insurance options and premiums.

Frequently asked questions