How Your Credit May Affect Your Life Insurance Premiums
You may be surprised to learn about the potential relationship.
Does your credit history partly determine the cost of your life insurance? It may. The potential for such a relationship may surprise you—and the relationship is not without controversy.
Insurers think a good credit history implies several things. It signals a consumer who routinely lives up to financial responsibilities. It telegraphs maturity in a young adult. It may also be characteristic of good health and a long life.[1]
That last sentence may have you scratching your head. Weird as it may seem, some life insurance providers see an excellent borrowing history as a predictor of continuing healthiness and longevity. Following this train of thought a little further, a poor credit history may be judged to reflect either inattention to, or ignorance of, personal financial responsibility. The root causes of that inattention or ignorance might cause those consumers to die earlier than others.[1]
Last year, LIMRA (a life insurance industry research firm) examined the data that insurance companies were reviewing as they considered life insurance applications. Twenty-eight percent stated that they used a predictive model encompassing consumer credit histories—one created by LexisNexis Risk Solutions, an analytics firm. Eighteen percent simply looked at consumer credit records directly. Eight percent relied on a TransUnion score for life insurance applicants.[1]
In some states, credit history also influences auto and homeowners insurance rates. The better the behavior, the thinking goes, the less inclined that consumer will be to file a claim. (It is illegal to use credit history as a factor in setting auto insurance premiums in California, Hawaii, and Massachusetts.)[1]
Other types of data may also be evaluated. In addition to credit history, insurance companies may also look at a consumer’s driving record, criminal history, use of prescription medicines, and applications for life insurance coverage submitted in past years. All this may affect life insurance coverage and premiums.[1]
Why are life insurance providers interested in all this information? They want to make their business models more efficient.
Life insurance underwriting usually takes weeks or months and includes a medical exam. In this digital age, the whole process looks very analog. By streamlining it around predictive models and abandoning or softening the exam requirement, insurers remove a psychological hurdle that stands in the way of some policy sales. Data-based underwriting can take as little as 48 hours.[2]
So yes, your credit history may affect what you pay for life insurance. While it may not be a prime factor, it does exert an influence.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations
1 - nerdwallet.com/blog/insurance/credit-can-affect-life-insurance-rates [6/18/18]
2 - investopedia.com/insurance/accelerated-underwriting-easy-life-insurance [3/7/18]
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.