Credit Score Impact On Life Insurance: What's The Link?

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, a good credit score can make it easier to get approved for life insurance without a medical exam and may lead to paying less for your policy. On the other hand, a poor credit score could serve as a red flag and result in higher premium costs.

Credit checks are becoming more common

Life insurance companies are increasingly turning to credit checks as a means to automate and accelerate underwriting. By incorporating credit records into their assessment, insurers can streamline the approval process, allowing applicants to obtain life insurance more quickly and with lower premiums. This shift is evident in industry surveys, which revealed that the use of credit records by insurance companies grew from 18% in 2017 to 49% in 2019.

It's important to note that a credit check by an insurance company is recorded as a soft inquiry, which does not impact your credit score. This is in contrast to applying for loans or credit cards, which results in a hard inquiry and can cause a minor drop in your score.

While your credit score alone won't determine your life insurance premiums, the details of your financial history will be considered. Factors such as bankruptcy, large credit card balances, and missed payments can indicate financial risk to insurers and may result in higher premiums or application rejections. Therefore, maintaining a good credit score and financial health is important to obtain favourable terms on your life insurance policy.

Credit-based insurance scores are different from credit scores

Credit-based insurance scores and credit scores are calculated for different purposes and are used by different types of companies. While both scores are based on similar underlying information, they are not the same.

Credit-based insurance scores are designed to predict the likelihood that you will file insurance claims that cost the insurance company more than it collects in premiums. These scores are used by insurance companies to help set your premiums. The scores are based on your credit report and consider factors such as your payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. The specific weighting of these factors may vary depending on the insurance company.

Credit scores, on the other hand, are used by creditors to assess your creditworthiness and decide whether to approve loan or credit card applications. They predict the likelihood that you will fall behind on bill payments in the next 24 months. Credit scores are also based on your credit report, with factors such as payment history, credit utilisation rate, length of credit history, types of credit used, and recent credit applications.

The scoring ranges for credit-based insurance scores and credit scores also differ. Credit scores typically range from 300 to 850, while credit-based insurance scores can vary, such as the LexisNexis Attract score, which ranges from 200 to 997. Additionally, while creditors can decline your application or adjust your credit limit based on your credit score, insurance companies cannot solely rely on your credit-based insurance score to determine rates or decline applications. They must consider other factors as well.

A poor credit score may result in higher premiums

While a credit score alone won't impact life insurance premiums, a poor credit score may result in higher premiums. This is because a credit check is often used as part of the application review process, and a poor credit score can be a red flag for insurers. A credit check provides a credit-based insurance score, which is calculated using information from your credit report. This number is different from your credit score but is used by insurers to predict the likelihood that someone will miss a premium payment.

If you have a poor credit score, you may be seen as a financial risk and offered a policy with higher premiums or higher monthly rates. This is because policyholders with good credit-based insurance scores generally file fewer or less expensive claims, according to industry research and claims history. So, if you have a low credit-based insurance score, you may be charged more for your insurance.

However, it's important to note that a credit check is just one of many factors that insurers consider when evaluating your application. Other factors include your health and lifestyle, age, sex, and personal details. Additionally, some states restrict or limit how insurance companies can use consumers' credit information, although these restrictions usually apply to home and auto insurance rather than life insurance.

If you're concerned about the impact of your credit score on life insurance premiums, there are a few things you can do. Firstly, waiting for at least a year after a bankruptcy discharge can help you get better rates. Secondly, improving your credit score by paying down debt and paying bills on time can also positively affect your insurance rates.

A credit check won't negatively impact your credit score

A hard inquiry on your credit report will happen when you apply to borrow money, whether via a mortgage, auto loan, personal loan, or credit card. A hard inquiry will typically result in a minor hit to your credit score—a drop somewhere in the ballpark of five to 10 points. A single hard inquiry won't cause much damage, but multiple hard inquiries within a short time frame could cause a more notable drop in your score. Thankfully, that's not something you have to worry about when you apply for life insurance.

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. The insurance company will use your financial history to calculate an insurance score for you, and if you've filed for bankruptcy, regularly miss credit card payments, or have a history of driving violations, you could face higher premiums or application rejections.

Your credit score won't impact your life insurance application, but the same factors that hurt your credit score can affect your insurance options. For example, missing credit card payments or bankruptcies could lead to more expensive life insurance.

Improving your credit score can lower insurance rates

While your credit score alone does not directly impact your life insurance premiums, it is one of the factors that insurance companies consider when reviewing your application. A good credit score can make it easier to get approved for life insurance without a medical exam and may result in lower premiums. Therefore, improving your credit score can be an effective way to lower your insurance rates.

Credit-based insurance scores are calculated using information from your credit report, including bankruptcies, debt, bill-paying habits, the length of your credit history, and credit card usage. These scores are used by insurers because policyholders with good scores tend to file fewer or less expensive claims. While most insurers will not reject applications based solely on a low credit-based insurance score, they may offer a policy with higher premiums.

To improve your credit score and potentially lower your insurance rates, consider the following strategies:

• Review your credit report: Obtain a copy of your credit report from the three major consumer reporting companies (Equifax, Experian, and TransUnion) and carefully review it for any errors or discrepancies. Report any inaccuracies immediately, especially if you have been charged a higher rate or rejected for insurance due to your credit score.
• Pay bills on time: Set up automatic payments to ensure that you never miss a due date. This demonstrates financial responsibility and can positively impact your credit score.
• Manage debt effectively: Focus on paying down debt, especially credit card debt. If you have accounts in collections, negotiate to settle for a lesser amount. Making frequent payments, such as every time you get paid instead of once a month, can also help reduce your overall debt.
• Keep credit card balances low: Aim to use less than 30% of the credit available to you. This will improve your credit utilization ratio, which is a key factor in calculating your credit score.

By implementing these strategies and improving your credit score, you may be able to secure lower insurance rates and save money on your premiums. It is worth noting that waiting for at least a year after a bankruptcy discharge can also help you qualify for better insurance rates.

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