We hear so much these days about how credit, and credit scores in particular, can affect just about anything you want to do in life. But is this also true when it comes to applying for life insurance? Will a life insurance company charge higher premiums if you have bad credit?
The answer is: it depends.
Bad Credit Isn’t Generally As Big An Issue With Life Insurance
Generally speaking, credit is less of an issue when it comes to life insurance than it is with other types of insurance coverage. And it certainly doesn’t come close to the impact that it has when you are applying for either a job or a loan.
For example, credit can matter substantially when it comes to auto insurance. Bad credit is considered to have an impact on the person’s life, and therefore how they may drive. If you are stressed by having a large amount of debt, or by being unable to meet your obligations (evidenced by a poor credit score), the auto insurer may judge you to be a higher risk. The stress of living with debt problems could lead to reckless driving behavior, and that will affect premiums.
The situation was similar in regard to health insurance, at least before the implementation of the Affordable Care Act. Poor credit was believed to increase stress, which leads to high-risk behaviors, as well as impaired health.
The Effect on Premiums Will Vary From Company to Company
Exactly how bad credit will be handled will depend upon the life insurance company that you are applying to. For most, bad credit will not be an important factor. Some companies will assess a slightly higher premium, for reasons similar to why an auto insurance company might.
One credit issue you should be aware of however is that if you apply for life insurance while you are going through a bankruptcy proceeding, your application may be turned down. This is not because the insurance company is considering your bankruptcy to be an unacceptable risk. The main reason that it will be considered at all is because the insurance company will have substantial reason to doubt your ability to be able to pay the premiums on the new policy.
If you are going through bankruptcy, it is generally best to wait until either your case has been discharged (Chapter 7 bankruptcy), or long enough for you to establish a history of successful repayment (Chapter 13).
The Life Insurance Company Will Generally Require Access to Your Credit History
Even though credit history is not specifically a considered category in regard to a life insurance application, many life insurance applications nonetheless provide themselves with the ability to access your credit if they determine that there is a need. Typically, they will do this by having you check a box that will grant them access to your credit history as part of the application.
The insurance company may not pull up a credit report as a matter of course, but they may do so after noticing certain patterns. For example, a non-health related concern that a life insurance company will have is employment.
Naturally, they will want to know what kind of work that you do because certain occupations are considered to be more hazardous than others. If in the course of investigating your employment they learn that you are either unemployed, or have a history of spotty employment, they may pull and review your credit report as a way of getting a clearer view of your overall financial picture.
While your credit quality itself is unlikely to be reason for decline, or even for an increase in premium, it will be a corroborating factor in determining your overall insurability.
Employment Can Be a Bigger Issue
We just talked about how a life insurance company will investigate your employment to determine the risk factors associated with your particular occupation. But beyond occupational risk, the insurance company is very concerned about one very practical matter: that you have the capacity to be able to afford to pay the premium.
This can be a significantly larger issue to a life insurance company than the quality of your credit. There are certain expenses that a life insurance company incurs in order to write a policy on a new applicant. The company will need to be able to collect premiums for predictable period of time in order to recover their initial investment in your policy. Should your policy lapse after six months or a year due to inconsistent employment, the insurance company will take a loss on your policy. That’s an outcome that they will specifically seek to avoid at the outset.
If you need a life insurance policy, and you are at all concerned that either credit or employment may have an effect on your application, you will need to work with a life insurance agent who knows the ropes in the industry. There is no doubt that there are certain companies that are more concerned with both credit and employment than others. For that reason, you’ll need to limit your search to those that don’t consider such matters so closely. A good life insurance agent can help you do just that, saving you both time and money.
