Life Insurance And Credit Score: What's The Connection?

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. If you have good credit, it could 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, poor credit could serve as a red flag and result in higher premium costs. However, it's important to note that applying for life insurance won't impact your credit score, even if the company performs a credit check.

Credit checks during life insurance applications

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 financial history will be used to calculate an insurance score, which will be used to evaluate your overall financial risk. This is different from a credit score, which predicts how likely you are to pay back a loan.

If you have a good credit score, a credit check could help speed up the review and make it easier (and cheaper) to get life insurance. However, if you have poor credit, it could be a red flag for insurers and result in higher premium costs.

If a life insurance company pulls your credit report, it will be considered a soft inquiry, which does not change your credit score. A hard inquiry, which happens when you apply to borrow money, will typically result in a minor drop in your score.

While there's no direct link between credit scores and life insurance premiums, the same factors that hurt your credit score can also affect your insurance options. For example, missing credit card payments or carrying large credit card balances could lead to a higher insurance score and more expensive premiums.

To improve your insurance score, it's recommended that you pay loans and credit cards on time, keep credit card balances low, and extend your credit history.

Credit-based insurance scores

• Payment history of credit accounts, including payments made on time and missed payments
• Accounts in collections
• Credit card balances and credit limits
• Age of credit accounts
• Types of credit used
• Amount of past-due debt
• Whether you have recently applied for credit

Soft inquiries

When you apply for life insurance, the insurer will perform a soft inquiry of your credit report. Soft inquiries do not impact your credit score. They are recorded as a "soft pull" because insurance companies are not loaning you money or giving you credit.

A soft inquiry will be performed even if the insurer decides to dig into your credit. This is considered a good thing if you have strong credit, as it may help you save money on life insurance premiums. If you have poor credit, it could be a red flag for insurers, and you may have to pay higher premium costs.

A soft inquiry is different from a hard inquiry, which happens any time you apply to borrow money (for example, through a mortgage, auto loan, personal loan, or credit card). A hard inquiry will typically result in a minor drop in your credit score—usually somewhere between 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 notable drop in your score.

Improving credit scores

Improving your credit score can help you get better rates on your life insurance premium. While your credit score may not directly impact your life insurance premium, the same factors that hurt your credit score can affect your insurance options.

• Check your credit score regularly and review your credit report for any errors. Report any inaccuracies immediately.
• Always pay your bills on time. Setting up automatic payments can help ensure you don't miss any due dates.
• Focus on paying off your debts, such as student loans or credit card balances. If you have accounts in collections, consider negotiating to settle for a lesser amount. Making frequent payments, such as every time you get paid, can also help reduce your debt.
• Keep your credit card balances low. Aim to use less than 30% of the credit available to you, as your credit utilization ratio is a key factor in calculating your credit score.
• Maintain a long credit history and avoid applying for new credit lines frequently.
• Have a mix of different types of credit, such as credit cards, loans, or mortgages.
• Improve your overall financial health by reducing expenses and increasing your savings.

By implementing these strategies and maintaining good financial habits, you can improve your credit score and potentially lower your life insurance premium. Remember that a higher credit score indicates lower credit risk, which can lead to better rates and terms on insurance policies.

Credit scores and insurance options

When you apply for life insurance, insurers will typically perform a soft inquiry of your credit report, which does not affect your credit score. They use this information to calculate a credit-based insurance score, which is an internal metric used to evaluate your overall financial risk. If you have a poor credit-based insurance score, you may be deemed a financial risk, resulting in higher premiums or even application rejection.

Factors that can negatively impact your credit-based insurance score include bankruptcy, missed credit card payments, a high percentage of credit card use, and late or missing debt payments. Improving your credit score by paying down debt, maintaining low credit card balances, and paying bills on time can help enhance your credit-based insurance score and, consequently, your insurance options and rates.

It's worth noting that not all life insurance companies perform credit checks, and some states restrict how insurance companies can use consumers' credit information, particularly for home and auto insurance. However, the use of credit checks is increasing in the industry, with surveys showing that the use of credit records by life insurance companies grew from 18% in 2017 to 49% in 2019.

Frequently asked questions