Impact of Financial History on Life Insurance

Uncover how your financial history influences life insurance eligibility. Explore common red flags such as late payments, high debt, frequent claims, and inaccurate disclosures.

12 minute read
Originally published: March 15, 2022
Updated: June 30, 2023

impact of financial history on life insurance. Man analyzing his past financial patterns meticulously

Impact of Financial History on Life Insurance

Uncover how your financial history influences life insurance eligibility. Explore common red flags such as late payments, high debt, frequent claims, and inaccurate disclosures.

12 Minute read
Originally published: March 15, 2022
Updated: June 30 2023

Your financial history is something life insurance companies may look into when reviewing your life insurance application. This mainly consists of your credit history and score.

Are you looking to secure a life insurance policy in Canada? If so, it’s important to understand why your financial past matters. Life insurance is a crucial financial tool that provides protection and peace of mind for your loved ones. However, many people are unaware of the impact their financial history can have on their ability to secure coverage. 

In this article, we will explore why your financial past matters when it comes to life insurance in Canada. We will discuss how factors such as income, outstanding debts, and previous bankruptcies can affect your eligibility and premiums. By understanding the significance of your financial past, you can take proactive steps to improve your chances of obtaining the life insurance coverage you need. 

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.

The Importance of Financial History in Life Insurance

When it comes to life insurance, your financial history plays a crucial role in determining your eligibility and the cost of your premiums. If you have a positive financial history, including a high net worth, responsible financial management, and a stable income, you are more likely to be deemed a low-risk applicant. This can result in lower premiums and a smoother approval process. Conversely, a poor financial history with a low credit score, a history of missed payments, or significant debts may raise concerns for insurers. They may view you as a higher risk, leading to higher premiums or even potential denial of coverage.

How Your Financial Past Affects Life Insurance Premiums

Your financial past can have a direct impact on the cost of your life insurance premiums. Life insurance companies use a risk-based pricing model, which means that individuals who are considered higher risk are charged higher premiums. 

Financial history affects policy pricing. Insurers consider your income, debts, and financial obligations to determine the appropriate premium rates. Those with a stable financial history and manageable debt are often offered more affordable coverage. On the other hand, individuals with a turbulent financial history or substantial debt may face higher premiums to account for the increased risk associated with insuring them.

Your financial history also has an impact on coverage limits. Insurers may set limitations on the amount of coverage they are willing to provide or impose additional restrictions based on your financial background. This is done to mitigate the risk of insuring individuals who may be more likely to face financial difficulties or have a higher likelihood of lapsing on premium payments.

It is crucial to note that while financial history plays a significant role, it is not the sole determining factor in obtaining life insurance coverage in Canada. Each insurance company has its own underwriting guidelines and risk assessment processes. Understanding how your financial past affects life insurance premiums can motivate you to take steps to improve your financial standing. 

What Factors do Life Insurance Companies Consider?

Bankruptcy and consumer proposals are two legal options available to individuals in Canada who are struggling with overwhelming debt. Bankruptcy is a formal process where a person declares their inability to pay their debts, and their assets may be liquidated to repay creditors. On the other hand, a consumer proposal is an arrangement made with creditors to repay a portion of the debt over a specified period of time. 

Income, debt, and net worth are important factors that insurance companies consider when assessing an individual’s eligibility for life insurance coverage and determining the appropriate coverage amount. The relationship between these factors helps insurers gauge an applicant’s financial stability and ability to pay premiums over time. 

Insurance companies consider these main factors to assess an individual’s financial stability and determine appropriate coverage amounts. By doing so, they aim to strike a balance between providing sufficient coverage and ensuring the policy remains affordable and sustainable for the insured.

Note that although companies will ask for your financial history, life insurance companies will still tend to focus on the applicant’s health and lifestyle while underwriting to determine if you’re able to be approved for coverage. 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

In most cases, the biggest impact from these factors 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. 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

This information is not reflected in your financial history, and 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 These Financial Factors Will Affect Your Life Insurance

Previous bankruptcies are also significant factors that life insurance companies consider. Bankruptcy indicates a severe financial setback and may raise concerns about an individual’s ability to meet financial obligations. Insurers typically view bankruptcy as a red flag and may either charge higher premiums or deny coverage altogether. However, the impact of bankruptcy on life insurance eligibility can vary depending on the length of time since the bankruptcy occurred and the steps taken to rebuild financial stability.

Insurance companies often use a multiple of income as a guideline to determine the maximum coverage amount they are willing to offer. For example, if an individual’s annual income is $50,000 and the insurer’s policy allows coverage up to 10 times the income, the maximum coverage amount would be $500,000. This approach helps ensure that the premiums remain affordable for the insured and that the policy is within their financial means.

Net worth is another factor that insurers consider because it reflects an individual’s overall financial position. Insurance companies want to ensure that the policyholder has sufficient assets to cover their financial obligations and potential expenses, such as mortgage payments, debts, and other financial responsibilities. For example, if an individual has a negative net worth due to significant debts, an insurance company may be hesitant to provide a large life insurance policy.

Another important consideration for life insurance companies is outstanding debts. Insurers analyze an individual’s outstanding debts, such as mortgages, loans, or credit card balances. High levels of debt can be seen as a financial burden and may increase the risk associated with insuring an individual. However, it’s important to note that not all debts are viewed equally. For example, a mortgage is generally considered a secured debt, whereas credit card debt is unsecured.

Understanding the factors that life insurance companies consider when assessing financial history allows you to anticipate how your specific circumstances may affect your eligibility and premiums. This knowledge empowers you to take proactive steps to address any red flags and improve your financial standing before applying for life insurance.

Common Financial Red Flags That Can Impact Eligibility

Life insurance companies assess specific financial red flags that can affect one’s eligibility for coverage, as they indicate financial instability or increased risk. Understanding these red flags empowers individuals to take corrective actions and potentially enhance their prospects of securing life insurance.

Financial red flags for insurance companies are: late/missed payments, substantial debt, frequent insurance claims, and inaccurate disclosure of financial information

Late or missed payments on credit accounts: Consistently failing to meet payment deadlines suggests a lack of financial responsibility and an elevated risk of defaulting on insurance premiums. Life insurance companies scrutinize an applicant’s payment history, including instances of late payments or collections.

Substantial debt: Excessive debt burdens an individual’s financial resources and heightens the likelihood of defaulting on premium payments. Insurers typically evaluate an applicant’s debt-to-income ratio to gauge the extent of their debt burden. A high debt-to-income ratio implies that a significant portion of one’s income is allocated to debt repayment, leaving less capacity for premium payments.

Frequent insurance claims: Life insurance companies consider an individual’s past claims when evaluating their application. Frequent claims may indicate an increased risk of premature death, potentially resulting in higher premiums or denial of coverage. It is worth noting that not all insurance claims are viewed negatively, particularly those related to non-life-threatening conditions. However, a pattern of excessive claims or claims associated with high-risk activities may raise concerns.

Inaccurate or incomplete disclosure of financial information: It is crucial to provide accurate and comprehensive details during the life insurance application process, as any discrepancies or omissions can be interpreted as an attempt to mislead the insurer. Life insurance companies heavily rely on the information provided to assess an individual’s risk profile, and any misrepresentation may lead to coverage denial or policy cancellation.

By familiarizing oneself with these typical financial red flags, individuals can prepare effectively for the life insurance application process. Addressing any concerns or issues related to their financial history enhances the likelihood of obtaining the desired coverage.

The Connection Between Bankruptcy and Life Insurance Approval

Bankruptcy can have a significant impact on your ability to secure life insurance coverage. As previously mentioned, life insurance companies typically view bankruptcy as a financial red flag and may consider individuals with a history of bankruptcy to be at higher risk. However, the connection between bankruptcy and life insurance approval is not always straightforward.

The impact of bankruptcy on life insurance eligibility can vary depending on several factors, including the length of time since the bankruptcy occurred and the steps taken to rebuild financial stability. Life insurance companies typically ask applicants about any past bankruptcies on their application forms. It’s crucial to provide accurate and complete information to avoid potential issues with your coverage in the future.

If you have recently filed for bankruptcy, it may be more challenging to obtain life insurance coverage. Insurers may require a waiting period after bankruptcy before considering an application. During this time, it’s crucial to focus on rebuilding your financial stability and demonstrating responsible financial behavior.

It’s important to work with an experienced life insurance broker or agent who can guide you through the application process and help you find the best coverage options given your specific financial history.

Accurate Disclosure in Life Insurance Applications

Accurate disclosure is crucial when applying for life insurance. Life insurance companies rely on the information provided by applicants to assess their risk profile and determine their eligibility for coverage. Failing to disclose accurate and complete information can have serious consequences, including denial of coverage or the cancellation of a policy.

Life insurance applications typically require detailed information about an individual’s personal and financial history. It’s important to answer all questions truthfully and provide accurate information to the best of your knowledge. This includes disclosing any relevant medical conditions, previous insurance claims, and financial obligations.

Misrepresenting or omitting information on a life insurance application can be viewed as an attempt to deceive the insurer. Life insurance companies have the right to investigate any discrepancies or inaccuracies in an application. If they discover that information was intentionally misrepresented or omitted, they may deny coverage or cancel an existing policy.

Accurate disclosure is not only essential to ensure you obtain the coverage you need but also to protect your loved ones. Inaccurate information can lead to claim denials, leaving your beneficiaries without the financial protection they rely on.

Frequently asked questions (FAQs)

Credit scores tend to range from 300-850. A bad credit score tends to fall on the lower end between 300 and 629. However, this is just a general benchmark because financial institutions use different scoring systems.

Absolutely you can! While a poor credit score may impact your premiums, it does not automatically disqualify you from coverage. Insurers consider various factors in addition to your credit score when assessing eligibility. Your health and habits are much larger considerations.

If you have filed for bankruptcy recently you may be required to wait a period of time before life insurance companies will approve your application.

No, a life insurance credit check is considered a soft inquiry, and will have no effect on your credit score in any way.

Bankruptcy does not automatically disqualify you from obtaining life insurance coverage. Insurers review your bankruptcy history along with other factors to assess your eligibility. While it may make it more challenging to secure coverage, it is still possible.

Outstanding debts can impact your life insurance premiums. Insurers assess your debt-to-income ratio to determine your financial stability. Higher debt levels may result in higher premiums as it indicates a higher likelihood of financial strain.

Yes, it is crucial to disclose accurate financial history information during the application process. Honesty and transparency are key during the underwriting process. Failing to disclose accurate information can have severe consequences, such as denial of claims or cancellation of the policy.

Yes, you can improve your financial history to potentially secure better life insurance rates. By paying bills on time, reducing debt, monitoring credit reports for errors, and seeking professional advice, you can gradually improve your financial situation and influence the premiums you pay.

Finding the right life insurance for you

Life insurance companies closely analyze various financial red flags to assess an applicant’s risk profile and make informed decisions. By being aware of these factors and taking proactive steps to address any financial concerns, you can greatly improve your chances of obtaining the life insurance coverage that you deserve. Understanding the connection between financial history and life insurance in Canada is crucial when making informed decisions about your coverage. It is also important to note that while financial history plays a significant role in determining premiums and eligibility, it does not automatically disqualify you from obtaining life insurance.

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.  

To schedule a consultation about your income protection goals, or if you have any questions about insurance in Ontario or Canada, please 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, British Columbia and Alberta including areas such as Toronto, Kingston, Calgary, and Victoria.

Talk to an advisor today.

Best Life Insurance Quotes Canada