How Your Credit Score Impacts Your Ability to Get Life Insurance

Life insurance companies sometimes use your credit report information in the underwriting process to consider your application. They don’t use your credit score directly, but financial factors on your credit report can potentially affect your premiums, too.

The good news is credit factors are only one small part of your entire application, and someone’s credit history can often have a neutral or positive impact. Here’s why life insurance companies want to know about your credit and how it can impact your policy.

Factors That Affect Your Credit Score

As a refresher, your credit score is a numerical score that indicates how likely you are to repay a debt on time. FICO is one of the main companies determining your credit score. Your score is based on several factors:

• Length of credit history (15 percent)

• Payment history (35 percent)

• Amount owed (30 percent)

• New credit (10 percent)

• Credit mix (10 percent)

Credit scores generally within a range from 300-850, with higher scores being better. The line between “good” and “fair” credit, or “fair” and “poor,” varies from company to company. A score in the mid-600s is likely to be considered fair, and scores under 579 are more likely to be considered poor. 

How Life Insurance Companies Use Your Credit Score

Using credit as part of underwriting is a fairly new practice. Automobile and homeowners’ insurance companies have used credit reports as one factor in underwriting for about 20 years. Not all life insurance companies use credit checks, but it’s an increasingly common part of underwriting.

This shift may have happened in part because of an increase in accelerated underwriting or “no medical exam” life insurance. Especially without a medical exam to provide insights to help underwriters, insurance companies may have added other practices to gather information they need to process no-exam applications quickly.

A life insurance company doesn’t use your credit score directly. Instead, they might do a credit check as part of calculating your insurance score (also known as a credit-based insurance score). The underwriter or insurance company might not even be able to see what your credit score is at all. But similar factors on your credit report that affect your credit score, like payment history or bankruptcy, can also contribute to your insurance score. Underwriters use your insurance score (not your credit score) as a factor in evaluating your application.

Will a life insurance credit check hurt my score?

When insurance companies check your credit, they do what’s called a soft inquiry. Soft inquiries show up when someone runs a check as part of a screening process. Hard inquiries happen when a potential lender checks your credit to consider you for a loan. A hard inquiry will typically temporarily knock off a few points (e.g., often five points or less) from your credit score. A soft inquiry will not.

The simplest rationale for why this happens is that a potential lender looking at your credit could indicate you might be taking on new debt soon. More debt means more risk, so that can reflect in your score. A soft inquiry can happen when you look at your own credit report, an employer checks as part of job screening or underwriters check. Even though a life insurance policy has a face value, it’s not a loan and doesn’t fall into the same category as a credit card company, for instance. 

How Your Credit Score Affects Life Insurance

Insurance underwriters work to calculate risk. For life insurance underwriting, that generally means they’re interested in your overall likelihood of living a long life. A life insurance applicant who is statistically likelier to die sooner is a higher-risk person to insure. 

Although health factors may feel the most relevant for life insurers, it’s also possible for someone to be a financial risk.

Factors like bankruptcy, high credit card balances or a history of late or missing payments might suggest you’d struggle to make premium payments on a policy. Some insurance providers may restrict you from buying a policy for a certain period of time if you have a bankruptcy on your report. That’s why an unfavorable insurance score can be a factor in higher premium rates or a company declining your application. 

Some states allow insurers to consider credit information in assessing insurance applications, while some states don’t. 

In many cases, credit may not have much impact on your life insurance application at all. If you have significant issues in your credit history, then it might make a difference on your premium rates.

Rights and Regulations Affecting Life Insurance Credit Checks

States can set their own rules for whether insurance companies can use credit as a factor in considering applications. A few states prohibit or restrict how companies can use credit information, but these rules are usually for auto or homeowners’ insurance, rather than life insurance. You can check your state’s department of insurance to learn what rules apply where you live.

If a life insurance company uses credit-based insurance scores as part of their underwriting practices, you might not be able to opt out. Under the Fair Credit Reporting Act (FCRA), insurance underwriting is a “permissible purpose” to check your credit without your explicit permission. You also most likely will not be able to look up what your insurance score is, as this is internal to the company and can vary from company to company.

You do have the right to check your credit report, and rules have recently changed to make this easier. You can get a free credit report every week from the three main credit bureaus: Experian, Equifax and TransUnion. You used to be entitled to a free credit report annually, but this changed to weekly in 2020 due to the pandemic, and the change has been extended indefinitely.

Under the FCRA, insurance companies have to let you know if they have taken an “adverse action” based on information in your credit report. Adverse action can mean denying or canceling coverage, charging higher rates or making unfavorable changes in terms. 

Can You Get Life Insurance With Bad Credit?

If you’re applying for a personal loan or a mortgage, your credit score can play a big role in whether you get favorable rates or even get approved at all. By contrast, life insurance companies are interested in a much broader picture of you than your finances alone. Information from your credit report is only one component of your profile.

Life insurance underwriters consider your health, age, gender and other factors to make a decision about your application. While your credit may be able to influence an insurance provider’s decision, that doesn’t mean lackluster credit will keep you from finding a policy. Other factors like your health may have a larger role.

Credit habits are only one piece of the safety-risk equation in anyone’s life. Overall, the safer and healthier life you lead, the more likely you are to qualify for the most favorable rates for your policy.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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