When applying for a life insurance policy, your age and health are usually the main topics of discussion. But your financial status also plays a role in whether or not you can get coverage. Included in that is your credit score, but just how much of an influence does it have on your premiums? Here, we’ve pulled together the details to give you the lowdown of the impact of a credit score for life insurance and your ability to get coverage.
What role does a credit score play in life insurance?
The good news first: your credit score doesn’t affect how much you pay for life insurance. If you’ve got a lower score, theoretically, it won’t cause your premiums to rise. So if you’ve just moved to the country or are of a younger age and haven’t had the chance to build your score, it won’t hinder your chances of getting life insurance.
The contents of your credit report can have a negative impact, however. When a life insurance provider assesses your suitability for a policy, they’ll assign you an insurance score based on your income and debts, insurance history, and driving history. All of these affect your premium and play a role in how much you’ll pay each month.
Factors like past bankruptcies, late payments, and a large amount of unmanaged debt can all lead to you paying a higher premium than someone who has a grip on their finances. So while a credit score alone won’t ruin your chances, when combined with other factors like a poor driving record and previous insurance, it can bring up red flags, which may lead to increased premiums.
What exactly is a credit score?
A credit score is a number assigned to you by banks and other institutions. It determines how reliable you are with credit and whether or not you’re deemed a financial risk. Generally speaking, the lower your credit score, the harder it is to get things like mortgages, credit cards, and loans.
Your credit score is a way for financial organizations to tell if you can afford to repay any money you’ve borrowed and if you’re responsible with finances. The higher your score, the lower your interest rates–plus, you’ll have better access to financial products.
Most credit agencies score you out of 850, and anything above 700 is considered a good and healthy score. FICO is the primary data reporting agency and uses a combination of data to award you a number. The data is then distributed to banks, who can decide whether or not you can borrow money with them.
How are credit scores calculated?
From payment history to credit age and usage, several factors determine your score. Each one is given a weight of importance and can impact your report negatively if you don’t manage it well. The main factors contributing to your credit score include:
- Making payments on time
- Debt usage
- Credit age (the number of years for which you’ve had an account)
- Mix of accounts (how many you own)
- Credit inquiries (how often you apply for credit)
Making payments on time is the most important aspect and counts for a significant portion of your report. Debt usage is the second most vital, with credit age, a mix of accounts, and credit inquiries.
Red flags to look out for on your credit score
When it comes to getting life insurance, there are certain red flags that you need to look out for. That’s because, even though your credit score won’t directly affect your application, some details from the report can suggest that you might be a financial risk to the insurer. These include:
- Bankruptcy
- Having large credit card balances
- High percentage of credit card usage
- Late or missing debt payments
Each provider has its own methods for deciding your eligibility, and some may place more weight on your credit score than others. For example, one insurer could have specific rules relating to bankruptcy while another provider is more lenient if the discrepancy refers to something that happened in the past but has since been fixed.
How can I access my credit score?
There are three primary credit reporting agencies: Equifax, TransUnion, and Experian. They all offer one free report each year–including your credit and FICO score–so you could technically get your score every four months by using all of them.
This way, you can keep up to date with your score and request removals from the report if you find inaccurate information. Regularly reviewing your report can also help you stay on top of things like identity theft and generally ensure that everything runs smoothly.
How can I improve my credit score?
You can always update your credit score if you believe it needs improvements, whether it’s to feel more confident about getting a good life insurance premium or for borrowing money from banks, etcetera.
Start by ensuring that your credit to debt level is good, aiming for a 25-30% ratio. This is the primary way to improve your score, and it can account for as much as a 40-point rise. Also, try and make all payments on time so that you don’t get any negative marks on your score against late payments. Lastly, don’t open too many accounts, especially in a short period of time. This will ultimately count negatively against your score.
In conclusion: Credit score for life insurance
The actual score provided by a credit reporting agency won’t directly impact your chances of getting life insurance, but certain factors inside the report might. Therefore, it’s worth keeping on top of your credit score and managing finances, from paying debt on time to keeping a good debt to credit ratio. Do this, and you can expect a swift process from a financial point of view when it comes to getting a life insurance policy.