Credit Checks: A Prerequisite For Life Insurance?

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, events in your financial history that affect your credit score could also affect how an insurer evaluates your application. 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, if you have poor credit, it will only be one of many factors that the insurance company considers.

Credit checks are becoming more common in the life insurance application process

In the past, the life insurance underwriting process involved medical exams and waiting for test results, which could take a long time. By using credit checks and other data that can be quickly gathered and reviewed, insurers are trying to automate and accelerate the underwriting process. This allows applicants to get approved with limited or no medical exams, making it easier for more people to qualify for life insurance with lower premiums.

It is important to note that a credit check is not the only factor considered in the life insurance application process. Insurers will also look at other factors such as age, health, smoking status, hobbies, habits, and medical history. Additionally, some states restrict or limit how insurance companies can use consumers' credit information, and these restrictions typically apply to home and auto insurance.

When a life insurance company does perform a credit check, it is usually a soft inquiry, which does not impact an individual's credit score. The company may be looking for specific information in the credit history, such as bankruptcy filings, which could impact the approval of a policy and its cost. The credit-based insurance score attempts to predict the likelihood of missing a premium payment and helps determine if a medical exam is required, as well as the policy cost.

While a credit check may not be the primary factor, it is becoming an increasingly common tool used by life insurance companies to assess risk and streamline the application process.

Credit-based insurance scores are calculated differently from credit scores used by lenders

Credit-based insurance scores and credit scores used by lenders are calculated differently. While both are based on information found on your credit report, they are weighted differently. This is because a credit score is meant to estimate the likelihood that you’ll pay your debts, while a credit-based insurance score looks at how likely it is that you'll file an insurance claim.

• 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 have.
• Credit history length (15%): The amount of time 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.

Credit-based insurance scores are also not used in isolation to set pricing or deny insurance to any consumer. They are most often just one of many factors used in an insurer's underwriting evaluation. For example, most insurers use an insurance score along with a motor vehicle report, claims history report, home inspection, and other types of information in their decision-making process.

A credit check will not impact your credit score

When applying for life insurance, the insurance company evaluates your risk of death and assigns a cost to the policy accordingly. This process involves a review of your medical history, lifestyle habits, and financial information. While your credit history is assessed, it is important to know that a credit check will not impact your credit score.

Life insurance companies are increasingly using credit checks as part of the application review process. This allows them to automate and accelerate the underwriting process, making it quicker and easier for applicants to obtain life insurance. However, it's important to note that a credit check is just one of many factors considered by insurance companies.

When a life insurance company conducts a credit check, it performs what is known as a "soft pull" or "soft inquiry". This type of credit check will not negatively impact your credit score. Unlike a hard inquiry, which occurs when applying for a loan or credit card and can lower your credit score, a soft inquiry is only visible on credit reports obtained by the individual and not by lenders or creditors.

While your credit score itself does not directly affect your life insurance application or premiums, certain details from your credit report can indicate financial risk to the insurance provider. For example, a history of late or missed credit card payments, bankruptcy filings, or a high amount of outstanding debt can impact your insurance score, which is an internal metric used by insurers to evaluate your overall financial risk.

In summary, while your credit history is an important factor in the life insurance application process, you can rest assured that the credit check will not negatively impact your credit score.

A bankruptcy filing will impact your life insurance application

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, events in your financial history that affect your credit score could also affect how an insurer evaluates your application. A bankruptcy filing in your credit report could impact your ability to be approved for a policy and its cost.

The Impact of Bankruptcy on Life Insurance Applications

To increase your chances of getting cheaper rates, you need to demonstrate financial stability. This could include having a consistent income, holding stable assets like a home or car, and showing that you've established long-term income. You'll also need to wait for a period of time after your bankruptcy discharge, typically up to two years, to be eligible for most policies.

The timing of your life insurance policy purchase can also make a difference. If you buy a policy and file for bankruptcy shortly after, it may raise red flags with the court, who could scrutinize the purchase as an attempt to protect assets and avoid creditors.

In summary, while a bankruptcy filing will impact your life insurance application, it is not an automatic disqualification. By demonstrating financial stability and waiting for a period of time after your bankruptcy discharge, you can improve your chances of securing coverage at affordable rates.

Other factors, such as age, health, and lifestyle, are also considered when determining life insurance costs

Life insurance companies are increasingly using credit checks as part of the application review process. While a credit check could impact your life insurance underwriting process and premiums, other factors will likely have a larger influence on your costs. These factors tend to be centred around a person's health and the risks they take.

Age is the most important factor in determining your premium cost. The younger you are, the lower your payments. This is because younger applicants have a longer life expectancy and are less likely to get ill. The cost of a life insurance premium increases from 8% to 10% on average for every year of age.

Gender is also a key factor in life insurance costs as women generally live longer than men. However, gender is not the only factor that determines the prices of premiums. Other factors like lifestyle and age can make one policy more expensive than another.

Insurance companies also consider your health, lifestyle, family medical history, driving record, and whether or not you smoke. If you lead a risky lifestyle with hobbies such as racing cars, scuba diving, or rock climbing, you'll probably have to pay substantially more for insurance. Some companies also charge more if you have a relatively dangerous profession such as a police officer or a miner.

Having a family history of stroke, cancer, or other serious medical conditions may predispose you to these ailments and result in higher rates. Carriers are usually interested in any conditions your parents or siblings have experienced, especially if they have contributed to a premature death. Some life insurance companies factor in your family's health history more than others.

Many life insurance companies will also look at your driving record during the underwriting process. If you have DWIs or reckless driving charges, some insurers may refuse to offer you coverage. If you have multiple moving violations on your motor vehicle report, the insurer may raise your premiums.

In summary, while credit checks are becoming more common in the life insurance application process, other factors such as age, health, and lifestyle continue to play a significant role in determining insurance costs.

Frequently asked questions