Impact of Financial History on Life Insurance

Life insurance companies may ask questions relating to your financial history during your application. The most important factor they will consider is your credit history and score. Your credit history is a reflection of how well you are able to manage your finances, and the best insurance companies will check for red flags. Having a low credit score may not keep you from obtaining life insurance, but it will affect how much you pay in premiums. Your financial history is simply another factor life insurance companies will consider alongside your age, lifestyle and health.

In this article:

• What is your financial history?
• What is a credit report?
• What is a credit score?
• Difference between credit-based insurance scores and credit scores used by lenders
• How do credit insurance scores work?
• What factors do life insurance companies consider?
• How will these factors affect your life insurance?
• Do life insurance companies check your credit?
• What do life insurance companies check for in your financial history?
• When will bad credit result in being denied life insurance?
• Does a life insurance credit check impact your credit score?
• FAQs

What is your financial history?

Your financial history is more commonly known as your credit history and the corresponding report. If you have a credit card issued by your bank or have taken out a loan at some point during your life, you will have a credit history. Your credit history is a tool used by financial institutions that reflect how you use your money. It answers questions such as:

• How many credit cards do you have?
• How many loans do you have?
• Do you pay your bills on time?
• How do you pay your bills?

This information is useful to businesses who want to know more about your financial habits prior to lending you money. This can include employers who measure your responsibility or cell phone companies who want to ensure you are taking on a burden you can handle.

What is a credit report?

A credit report is a document that summarizes your credit history. It lists out important information such as:

• Name
• Address
• Social insurance number (SIN)
• Credit cards
• Loans
• How much you owe
• If you pay your bills on time

This information is collected and catalogued by credit reporting companies. The two main credit bureaus in Canada are Equifax and TransUnion. These two companies continuously write and keep tabs on your financial transactions.

You can obtain a free copy of your credit report every year; one from each of the major credit reporting companies. This can be done through the official Canadian government website. Some sites or companies may say you can get a free report from their website or link, but be wary of scams.

You may not have a credit history if:

• You have not had a credit card
• You have not gotten a loan from a bank or a credit union

What is a credit score?

A credit score is a number that is based on your credit history. The higher the number, the better your credit. Different companies use different measures for their credit score. However, low scores tend to lie in the 300’s, while higher scores score above the 700-800 range.

Your credit score does not come free like your credit history, and you are required to pay for it. Some companies may advertise otherwise, but they are often charging you hidden fees. That being said, your credit score directly correlates to your credit history meaning if you have a good credit history, you will have a high credit score.

Difference between credit-based insurance scores and credit scores used by lenders

During your application for a new line of credit, such as a credit card or a loan, a creditor may pull up your credit history to review. This review will analyze the credit score given to you based on your credit report. These scores generally range from 300 to 850 and provide a basis to predict the likelihood that an individual will fall 90 days past due on a bill, within the next two years.

Insurance companies such as life, home or car insurance, will look over your credit history and score as well. However, they will score you themselves with a credit-based insurance score that serves a different purpose and lies within a different range. They also consider the contents of your credit report differently and may pull data from other sources to score you. There are some restrictions in place as to how insurance companies can use their consumers’ data, but these are only applied in certain situations.

How do credit insurance scores work?

The information on your credit report and insurance claims will influence your insurance score. This score reflects how high of a risk life insurance companies consider you based on your financial history. This is also sometimes known as a credit-based insurance score or credit insurance score. You generally have a higher credit score if you:

• Pay loans and credit cards on time
• Don’t have a high amount of outstanding debt
• Have a longer credit history
• Haven’t submitted many recent requests for new lines of credit
• Have a varied mix of credit

Unlike your credit history and score, you are unable to acquire your credit insurance score. It is also important to keep in mind that your credit insurance score does not factor in your age, gender, health or lifestyle. These will also be important considerations for life insurance companies during the underwriting process.

What factors do life insurance companies consider?

Your financial history may have an impact on your life insurance application and the premiums assigned to you after the underwriting process. However, life insurance pays out when an individual passes away, and the factors they consider reflect this. Your credit report may reflect your ability to pay premiums, but life insurance companies tend to focus on the applicant’s health and lifestyle. These factors include:

• Age – younger individuals are less likely to die soon, senior individuals are more likely to be a death risk
• Gender – women tend to live longer than men
• Medical history – physical and mental health history reflects your risk of death
• Family medical history – may show hereditary diseases
• Hobbies – risky hobbies, like flying, increases your risk of death
• Work – dangerous working environments will increase your life risk
• Driving records – being a safe driver or a driver with a history of accidents affects your life insurance
• Criminal records – risky behaviours affect your life insurance
• Life insurance policy – longer-term policies with higher benefit amounts will be more expensive than the alternative short-term policy with low benefits

This information is not reflected in the credit report or score. Life insurance companies will obtain it from a variety of sources including your application, medical records and a medical exam. These companies may also pay for information from outside sources, such as consumer reporting companies.

How will these factors affect your life insurance?

The factors considered by life insurance companies vary in their impact on your application and policies. Some of the more important ones, such as age and medical history, can impact your ability to be insured and in some cases even cause your application to be denied. In these cases, it may be in your best interest to look into policies with more lax requirements like no medical insurance policies. 

In most cases, the biggest impact will be reflected through your life insurance premiums. Based on their analysis of how high or a risk they are taking in order to insure you, they will increase or decrease the price of your insurance.

Do life insurance companies check your credit?

Your financial history will not have a huge impact on your life insurance application or premiums. In some cases, the life insurance company will not even use a credit check. That being said, the traditional underwriting process is still a lengthy and tedious process filled with medical exams and waiting for test results.

Your credit report and score, along with other data that can be quickly obtained and reviewed, is one-way life insurance companies are trying to automate and accelerate underwriting. Those who are healthy and deemed low-risk by their application report and data may be approved with limited to no medical exams. Having a high credit score may allow you to efficiently qualify for life insurance with lower premiums.

In the event that a life insurance company does look at your credit, it will be perusing for specific information within your credit history. This can include bankruptcy filings that will affect your ability to be approved. The company may also be trying to predict your ability to pay premiums periodically.

What do life insurance companies check for in your financial history?

Your credit history grants life insurance companies a snapshot of how well you can manage your finances. Life insurance companies tend to look out for red flags that may indicate you are too much of a risk to insure.

Every provider will take these factors into account differently, but they follow a general outline during the underwriting process. Some insurers have rules regarding bankruptcy and require the bankruptcy to be discharged for a year or two before you can apply for the policy at all. In most cases, having a low credit score will not hurt your chances of qualifying for life insurance, but it may raise doubts regarding your ability to pay premiums. 

Your credit history is an indicator of your ability to repay your debts. To measure this, underwriters may look at:

• The number of credit accounts you have
• The types of credit accounts you have
• The amounts you owe
• How much of the available credit you have used
• Whether you pay your bills on time

When will bad credit result in being denied life insurance?

It is rare, but in some cases, having a low credit score will cause a life insurance company to deny your application outright. This is really only the case when an individual has filed for bankruptcy because it means you have no way to pay the premiums.

The best thing to do in that scenario is to work on establishing a positive repayment history. This may take a duration of time, and you may be saddled with even longer wait times posed by the life insurance company itself depending on the reason for your denial.

Does a life insurance credit check impact your credit score?

A credit check will occur whenever you apply for a new credit card or loan, and these are classified as hard inquiry credit checks. These may hurt your credit score as a result of extending a new line of credit.

On the other hand, life insurance credit checks will not have any impact on your credit score. If a life insurance company decides to check your credit report or purchase a credit-based insurance score analysis during the underwriting process, this will be recorded as a soft inquiry. Soft inquiries are not used in the calculation of your credit score.

Frequently asked questions (FAQs)

Finding the right life insurance for you

While your financial history may not have the largest impact on your life insurance, it is still worthwhile to look into how it may affect your premiums. Your credit history and score will be factored in alongside many other health and lifestyle-related considerations. In order to best understand how to get the right life insurance for you, seek the help of an agent.

At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to create the best solution for you and your needs. We’ve been providing expert life insurance solutions since 2007, including no medical life insurance, term life insurance, and permanent life insurance, to build the best package to give you the protection you need.  

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, including areas such as Burlington, Oshawa and Waterdown.