FROM THE LEARNING CENTER

Life Insurance Credit Checks & How They Affect Your Credit Score

by Bestow Team | August 09, 2021

8 Minute Read

It probably doesn’t come as a surprise to hear that your credit history can have a big influence on your financial life.

If you’re thinking about buying a new car, your credit rating can determine whether your loan is approved as well as the interest rate you may pay. Likewise with a credit card, home loan, or other types of loans (boat loans, motorcycle loans, even loans to buy solar panels).

But it’s not just lenders that check your credit score. Employers, landlords, and even insurance companies may use credit history to determine approvals and rates.

Why Do Insurance Companies Run Your Credit?

You may wonder why insurance companies consider your credit in the first place. The answer is risk prediction. Your outstanding debts, length of credit history, late payment histories, a new credit inquiry, and other factors can determine your credit score.

Credit scores help others — lenders and insurance companies alike — to predict the risk of doing business with you. Credit scores range between 300 to 850. The higher the number, the better your credit score is. A good credit score means that you are likely a lower-risk customer, while a bad credit score means you could be a high-risk customer.

The average FICO credit score in the U.S. is 716. 

If you know your credit rating or score and are wondering where you stand, here is the FICO standard:

  • 800 — 850 Exceptional
  • 740 — 799: Very Good
  • 670 — 739: Good
  • 580 — 669: Fair
  • 300 — 579: Very Poor

What’s The Difference Between Your Credit Score And Your Insurance Score?

A FICO score or Vantage Score, also known as a credit score, is a three-digit number based on the information pulled from your credit reports. The credit-based scores lenders use and the scores used by insurance companies are not the same.

Lenders look at your regular credit score, while insurers review your credit-based insurance score.

Here’s a fun little breakdown of some key differences and similarities between the two. Well, we think it’s fun, but we work in insurance.

  • Both types of scores are based upon information found on your credit reports, sourced from the major consumer credit bureaus Equifax, Experian, and TransUnion.
  • Lenders rely upon credit scores to predict the likelihood that an applicant will become at least 90 days late repaying a creditor within the next 24 months.
  • Credit-based insurance scores are designed to predict how likely you are to file a claim which would result in future losses for the insurer, according to FICO.

A credit-based insurance score is made up of five factors:

  • Payment history (40%) — This includes both the timeliness and accuracy of your payments on past debts.
  • Outstanding debt (30%) — This component factors in how much total debt you currently hold.
  • Credit history length (15%) — This looks at the length of time you have held a line of credit.   
  • Pursuit of new credit (10%) — If you have recently applied for lines of credit, it will be factored in here.  
  • Credit mix (5%) — All the different types of credit you have are considered (auto loans, credit cards, mortgages). 

Credit-based insurance scores can be important when applying for new coverage, but they are certainly not the only factor evaluated. Insurance underwriters consider a variety of other information as well, including driving history and marital status, depending upon the type of coverage you are seeking.

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Do Insurance Quotes Impact Your Credit Score?

First and foremost, let it be known that not all credit inquiries are alike. The term “credit check” gets thrown around way too casually. In fact, there are two different types of credit inquiries — a hard pull or a soft pull.

A hard pull is voluntary, meaning you would need to give a creditor permission to run a credit check before they can do so. These types of credit inquiries are used when you apply for a line of credit, such as a home loan or a credit card. The lender uses your credit history to decide whether to approve your application and to determine what terms to offer.

If you apply for a line of credit, a hard inquiry serves as a heads up to other lenders that you are looking for credit. An excess of hard pulls can lower your credit score.

Life insurance credit checks are a different story. They use what is called a soft pull to peek at an applicant’s credit history. Soft inquiries have absolutely no effect on your credit score. Zero. Zilch. Nada. In fact, when you check your own credit score, you are performing a soft pull.

Furthermore, Experian explains that insurance inquiries are only visible on credit reports which you pull yourself, such as reports obtained through a credit monitoring site or AnnualCreditReport.com. They are not viewable on the credit report accessed by lenders or your creditors. If you’re shopping around to find the best insurance rate, rest assured that you can apply for as many insurance quotes as you want without it affecting your credit score. 

How Does Your Credit Score Affect Your Insurance Rates? 

You might be asking yourself why insurance companies check credit scores in the first place. Smart question. Credit scores allow insurance companies to assess the risk of taking you on as a policyholder and are used as a factor to determine your insurance premium (the amount you would pay for an insurance policy).

If you have a higher credit score, you’re likely to get lower insurance premium rates. The thought is that credit scores tend to correlate with financial responsibility and even the likelihood of a policyholder making a claim.

While claim frequency isn’t a concern with life insurance (you’ve only got one life, as they say), credit checks can be used to speed up the underwriting process. In some cases, a credit check can replace the once industry standard of a life insurance medical exam.

Do All Insurance Companies Perform Credit Checks?

Certain states (e.g. California, Hawaii, and Massachusetts) either severely restrict or do not allow credit to be considered at all for insurance purposes. However, if no state restriction is present, federal law does permit credit reporting agencies to release your credit information for insurance underwriting (Fair Credit Reporting Act, 15 U.S.C. § 1681).

Whether or not an insurance provider will require an insurance credit check for new applicants also depends upon individual company policy. In general, most insurers do opt to check credit when permitted to do so by law. 

It’s good to keep in mind, as mentioned above, even if you get sixty-three different life insurance quotes (random high number for dramatic effect) and every company checks your credit, your credit score will be unphased (because insurance companies use a soft pull). 

Which Insurance Products Consider Credit?

Here are a few examples of the different types of insurance products that often consider credit as part of the underwriting process. Other important factors which could impact your premiums and your ability to secure coverage are included below.

Auto Insurance

When you apply for auto insurance, underwriters typically consider information such as:

  • Your driving record
  • Your age
  • The type of vehicle you drive
  • Previous claims
  • Your credit-based insurance score

Home Insurance

Factors that could influence your homeowner’s premiums include:

  • The age and condition of your home
  • The breed or types of pets you own
  • The replacement cost of your home
  • Previous claims
  • Your credit-based insurance score

Life Insurance

The following details may be considered when you apply for life insurance coverage:

  • Your mortality score (custom score created by life insurance companies)
  • Your age and gender
  • Your medical history and your family medical history
  • Your health and lifestyle
  • Previous claims
  • Your credit-based insurance score (TransUnion’s TrueRisk® model is an example of the type of credit-based insurance score which might be used by a life insurance company.)

For more information about when to apply for life insurance and how life insurance companies specifically predict risk, click here.

Steps You Can Take to Improve Your Credit

The good news is that you have the right to check your credit reports at any time to make sure that they are healthy and to confirm that the information contained in your reports is accurate. You are even entitled to a free credit report from Equifax, TransUnion, and Experian once every 12 months via AnnualCreditReport.com. If you discover errors or mistakes when you check your credit, you have the right to dispute those errors under the Fair Credit Reporting Act.

Paying down credit cards and other outstanding debt can also help poor credit. Non-profit credit counseling agencies, such as those certified by the National Foundation for Credit Counseling (NFCC), may be a helpful option if your credit card debt has gotten out of control.

The condition of your credit can impact everything from your monthly auto payment to your ability to land a job. When it comes to insurance, there is a chance that credit problems could make it more difficult or more expensive to obtain coverage. In short, your credit matters.

How To Shop For Insurance If You Have Poor Credit

When it comes to life insurance, your credit score is just one of the many things insurers consider when determining rates. Your insurance cost is influenced by several different factors including age, gender, medical history, family health history, and smoking status. 

If you have a lower credit score or are just starting your credit journey, consider the other factors. If you’re twenty-five, in good health, and don’t smoke cigarettes, you might consider looking into term life insurance. With Bestow, you can apply for affordable term life coverage in as little as 5 minutes. Getting a free quote takes just seconds. Even if your credit is less than stellar, you might be surprised at the rate you’re quoted.