How Does Your Credit History Impact Your Life Insurance Rates?
Why Does Your Financial History Matter?
Life insurance pays out a death benefit if the insured person passes away within the coverage period. The payout can range from $5,000 to $1,000,000, depending on your contract with the insurer. In exchange for coverage, you’ll need to pay monthly, quarterly, semi-annual or annual premiums.
Insurance companies want to make sure that you’ll be able to pay your life insurance premiums in a timely manner to prevent your policy from lapsing. This happens when a policy gets terminated due to nonpayment. Having a questionable financial history can be a risk factor for insurers. It shows that you have a likelihood of not fulfilling some of your financial obligations, such as paying insurance premiums.
Credit-Based Insurance Score vs Credit Score
Strictly speaking, it’s not your credit score that may affect your life insurance premiums. It’s your credit-based insurance score that might make your premiums more expensive.
Credit scores are meant to predict loan delinquency, while insurance scores are meant to predict insurance losses. Your insurance score represents the probability that your beneficiaries will file a valid claim.
At first, the relationship between your finances and the likelihood you’ll file a claim may seem unclear. However, having a good financial standing shows that you’re a mature adult who is likely to make responsible decisions about your health, lifestyle, and longevity.
Additionally, multiple studies indicate that you’re less likely to cause losses to an insurance company if you have a high insurance score. For instance, a report from the U.S. Federal Trade Commission (FTC) shows that insurance scores are correlated with the number of filed claims.
What Is A Good Insurance Score?
Insurance companies calculate your insurance score based on the following:
- Outstanding debt balance
- Bankruptcies
- Length of credit history
- New applications for credit
- Number of credit accounts in use
- Credit mix (the types of credit you have)
- Number of insurance claims filed (e.g. health insurance claims, auto insurance claims)
- Timeliness of debt payments
Insurance scores range from 200 to 997. Generally, scores that are 770 and above are favorable, while those that are below 500 are considered poor.
A high insurance score shows lower risk and will translate to lower insurance premiums. Conversely, a low insurance score shows high risk and will translate to higher premiums.
What Factors Don’t Affect Your Insurance Score?
To avoid discrimination, there are some factors that are not considered when computing your insurance score. These include:
- Race, color, national origin
- Religion
- Gender
- Marital status
- Age
- Income, occupation, or employment history
- Address
- Child/family support obligations
- Counseling/mental health history
How Many Insurers Check Your Credit?
Not all insurance companies check your financial history during the underwriting process. A survey conducted by Munich Re Life US showed that only 40% to 65% of companies use credit-based scoring and predictive models.
Additionally, keep in mind that some states restrict or limit how insurance companies can use your credit information. Contact your state’s insurance regulator if you want to learn if your credit report can be used as a basis for increasing your insurance premium.
What If You Filed For Bankruptcy?
Life insurance companies have different rules about issuing a policy to someone who has filed for bankruptcy. In some cases, you might not even be eligible to apply for life insurance until two years after your debts have been paid off and your bankruptcy has been discharged.
Insurers see bankruptcy as a major risk factor because it suggests you might not have the financial means to make consistent premium payments. Even if they approve your life insurance application, they might label you as high-risk and charge you with expensive premiums.
To avoid high premium rates, you’ll need to show that you have the means to gain regular income. You should also have stable assets like a house or a car.
The good news is that, if you have an existing policy, filing bankruptcy won’t affect your current premium rates. It’s best to keep this policy and not allow it to lapse, even if you might be facing some financial trouble due to bankruptcy.
Tips On Getting Affordable Life Insurance If You Have Bad Credit
Life insurance premium rates are based on a variety of factors. If you want to get affordable coverage regardless of your insurance score, follow the tips below.
Check Your Credit Report For Errors
Since insurance companies base your insurance score on your credit report, you need to make sure it contains complete, accurate, and up-to-date information. You can request your credit report from big credit bureaus like Equifax, TransUnion, and Experian.
If you see any errors, contact the credit bureau to dispute outdated items or make any corrections. Removing these inaccuracies may help raise your score.
Review Other Reports That Impact Life Insurance
Life insurance companies don’t just look at your credit report. They also collect reports from a variety of sources to assess the risk of providing you with a policy. It’s important to review these records to see if there are any inaccuracies you should dispute.
Examples of these reports are the following:
- Medical Information Bureau (MIB) report: This report contains details about any life insurance applications you’ve filed in the past. It will contain any existing and previous medical diagnoses.
- Prescription drug history: Most states have a prescription drug database. Insurers can purchase data on your prescription drug use to see what type of medications you’ve been taking. This will also help them learn more about your past and present health conditions.
- Driving and criminal record: Having DUI/DWI convictions or a criminal history on your record can send a red flag to insurers. These offenses illustrate that you have a pattern of high-risk behavior, which results in higher premiums.
Maintain Healthy Habits
Life insurance premiums are based on your age, sex, health, lifestyle, hobbies, and occupation. If you quit smoking, for example, you pay lower premiums compared to someone who uses nicotine. You can also work with your physician to regulate your cholesterol levels and to stay within an acceptable BMI range.
Work With An Independent Life Insurance Agent
An independent life insurance agent will help you find a company that will offer you an affordable policy regardless of your credit score. They’ll also help you compare quotes and understand the extent of your coverage.
Final Thoughts
Having a complicated financial history can make your life insurance premiums more expensive. However, it’s important to remember that your finances are only one piece of the puzzle. Your insurance rates still depend on a multitude of factors, such as your age, sex, health, and family medical history.
If you want to get an affordable life insurance policy, get in touch with Wesley LLC. We’ll help you get the best rates, regardless of your credit history.