Life Insurance and Your Credit Score?
More than ever before, a credit score can play the role of the "gatekeeper" regarding pivotal life decisions. New home, renting a home, employment, establishing a new business, mobile phone service, education and more. I have even heard the question, “Would a poor credit score affect my potential life insurance premiums?” The not so simple 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 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 contract. If you fail to pay a premium, the policy could be in jeopardy of lapsing. In some circumstances the insurer benefits from a policy lapsing, so why would they ruin your credit because of that?
Obviously good credit is important to reaching financial goals and establishing peace of mind. The opportunity to repair poor credit begins with a few basic strategies. This resource should help. As with any financial decision, knowledge is your best friend. Get educated, make wise decisions and enjoy life!
About the author: Michele Cleary has been in the business for over 35 years and holds a CLTC designation. She believes that life insurance can give you and your family peace of mind, especially when you have other things to worry about. Michele now has 4 grown children and knows that proper planning is essential. You can reach her at 1-800-651-1953 or MCleary@Pivot.com.