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How Your Credit History Affects Life Insurance

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In the United States, your credit history is a key factor in determining your level of financial freedom and eligibility to carry out certain transactions. Having good credit (or not) can be a determining factor in gaining access to certain goods and services. Life insurance is only one of the many services that is easier to acquire if you have a good credit history.

In this article, we will explain what a credit history is and how it works, and discuss how it can affect life insurance and policy-holders. Read below to find out how your credit history can help or hurt you when purchasing life insurance.

Credit History and Life Insurance: Article Contents

What is Credit History and How Does it Work?

If you live in the United States, you probably already know how important your credit score is. In fact, it is one of the pillars of our financial system and a key factor which helps drive the national economy and, consequently, consumer spending. Your credit history is a record of your entire financial trajectory (bills, credit card expenses, taxes, bankruptcies, etc.), including whether you make or have made payments late or on time, and your track record overall.

If you fulfill all your financial obligations, you will most likely have good credit history and a high credit score. There are three agencies that give this rating or score: Equifax, Experian, and Trans Union. These companies are in charge of rating the financial reliability of each person in the United States. To do this, they collect information from banks, lending institutions, federal entities and other organizations. In some cases, the information each company has about you varies, meaning that you should find out what your score is with each of these three rating institutions.

Agencies prepare reports using this information that they later sell to other companies. Thus, when you apply for a loan, buy a house, or purchase a life insurance policy, your credit history provides details about your reliability and solvency.

Having poor credit can cause all types of problems. It can mean that you won’t qualify for a new loan, financing, or other types of services that require monthly payments. Sometimes, companies even take it into consideration for employment.

As you can see, it is very important, which is why you should always monitor your credit history and ensure that it is free of errors.

Credit History and Life Insurance

One of the services that can be negatively impacted by poor credit history is life insurance. Specifically, the insurance company reviews your credit history after you apply for the policy as part of the underwriting process, where they assess the risks they assume by selling you a policy. If your credit rating is poor, it can cause complications.

In reality, not all insurance companies use this information. According to a study carried out by LIMRA, an association of life insurance and financial companies in the United States, nearly a third of companies consider credit history in calculating the risk of their potential customers.

The other 18% of these use your credit history as a direct factor in whether to accept you or not, and another 8% uses a confidence rating scale developed by a company that also takes this information into consideration.

Then, companies generally combine this information with data from other sources, including traffic violations records, pharmaceutical company records or insurance sector databases.

Financial information is very useful for insurance companies. They know that people who have a good credit history make fewer claims, and consequently they are wary of those with poor ratings.

What they really do is use this data for risk assessment, which takes your habits, lifestyle, health, and tobacco use, along with your credit score, into consideration. Consequently, your credit score is a factor that can cause your risk assessment to be higher or lower. If it raises your risk, one of two things can happen: you can be denied coverage, or more frequently, your premiums will be higher.

On the other hand, if your credit is good, it might make things easier for you during the underwriting process, both for temporary life insurance and permanent life insurance. If this is the case, you might also have lower premiums, because your risk is lower.

To make these calculations, insurance companies use very sophisticated software that processes information and assesses risk. The more information the insurance company has, the more accurate the risk rating calculated with the algorithms the insurance company’s software uses is. All this credit information helps the insurance company to obtain more accurate results, thereby allowing customers access to lower prices.

How to Repair Your Credit History

As you can see, your credit history is a key factor in achieving a stable financial situation, and can be very important when purchasing life insurance. The problem is that many people have very poor credit.

If you are one of them, you should know that bad credit can also be improved. Here are a few tips that can help:

  • Request a copy of your credit report frequently. Credit companies and financial institutions can provide you with your record so that you can always be aware of what is happening with your financial situation. It is important to request your credit report from all three of the rating companies, because they can sometimes have incorrect information. To make a claim, write a letter to the credit rating company to let them know about the mistake. Explain that you want the information corrected or deleted from your record. Attach a letter to your credit history which clearly states what the error is and provide documentation to prove your claim. Always send this information via certified mail and request acknowledgement of receipt.

  • File a claim when you find a mistake. If your record contains errors, file an objection. Contact the companies and defend your rights, because you are the one who will suffer the consequences of poor credit.

  • Pay your bills. If you pay outstanding debt, your credit history will improve rapidly.

  • Use bills from public utilities. If you pay your bills for utilities, you can use these invoices and receipts to improve your credit history.

  • Take out a credit card from a store. If a store offers you a credit card, and you pay the bills, you will improve your credit score. But if you don’t need one, then it’s better not to request it. Paying and lowering the balances on your cards will increase your credit score.

Another situation that can occur is that you have no credit history. Having credit requires discipline and proper planning. To do this, start by applying for a credit card with your bank. When doing so, you should take a few important factors into consideration. These include:

  • The annual interest rate. Ask if the interest rate is variable, and how much it can vary throughout the year.

  • Annual fees. Many cards charge a fee just to have them.

  • Grace period. This is the time you have to pay the credit card before they start to charge you interest.

  • Fees. Credit cards can have a lot of fees attached to them. Make sure you are aware of how much it will cost you to maintain it.

By now, you understand how important having good credit is. And when applying for life insurance, it can be a key factor in determining whether you are approved or not. Be vigilant of your credit information, because it can help you in many ways.

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