Life Insurance and the Credit Score Dilemma
Many people ask, “Would a poor credit score affect my potential life insurance premiums?” Unfortunately, for the potential insured, the answer is yes. Insurance companies will take into consideration when determining a person’s rate class, what their credit score/history is. We may think this is unfair, but it is completely rational from an insurer’s perspective.
The rationale behind this fact is derived from the potential risk that an insurer faces in the payment of a life insurance claim. For example, it can be assumed that people who are not great money managers can be considered a higher insurance risk. Due to this potential higher risk, people with low credit scores could be more likely to file insurance claims than those with high credit scores. Much of this likelihood has to do with health factors: people that are financially unstable may also be less likely to live a healthy lifestyle. Financial woes can be very stressful and could lead to higher levels of stress, and we all know the damaging effects of stress in our lives.
The main issue however, is that an insurer is very concerned about one specific matter in general: does the potential insured have the capacity to afford the premium and be responsible enough to avoid lapsing the policy. This is by far, is a significantly larger issue for a life insurance company than the quality of your credit score. There are certain overhead expenses that a life insurance company incurs in order to write a policy on a new applicant and keep it on the books. The insurer wants to be able to collect premiums for predictable periods of time so they can recover their initial investment in the policy. Should a person’s policy lapse within the first year due to inconsistent payments, the insurer will surely take a loss. That is a situation that they will specifically seek to avoid at the outset.
On the flip side, some people might ask, “Do late payments or reinstatements on life insurance policies affect my credit score?” Fortunately, in most circumstances they do not. Unlike loans where you are expected to pay back a debt, your life insurance premium is not a debt. If you are late on a payment, the overhead cost of sending out late pay offers or reinstatements were factored into the initial overhead costs at the onset of the contact. If you fail to pay a premium, the contract will either go into an Automatic Premium Loan status if it is a permanent policy, into an extended term coverage status, or will simply lapse. In some circumstances the insurer benefits from a policy lapsing, so why would they ruin your credit because of that?
This month is Credit Education Month, so in my opinion, we should do ourselves a favor and reflect upon the status of our own financial responsibility which has to do with protecting what is most important to us. Are my spouse and children more important to me than anything else? If they are, then I believe I need to show it by getting the life insurance protection that is necessary to do so. Don’t let a low credit score keep you from protecting your family’s financial future!
About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.