Auto and home insurance companies have long used people’s credit scores and financial histories to aid in determining their risk.
In many cases, a person’s financial history correlates to how likely he or she is to file a claim.
Can Companies Use Your Credit Score And Financial History To Raise Rates?
But the use of personal financial data has become an issue, as some people think it is unfair to include credit scores among the reasons to charge higher rates.
In response, Massachusetts, California, and Hawaii have all voted to make it illegal for insurance companies to use credit scores to assess the risk level of an insured.
The use of financial and background history is somewhat new to the life insurance industry.
At one time, your health was the most significant determinant in how much your life insurance premiums cost.
Case in point: Life insurance applications have very few questions about a person’s financial history, and those are generally about bankruptcies.
Some companies ask whether there has been a bankruptcy within the last 12 months, others ask about the previous five years, and some don’t ask at all.
As customer information has become more accessible via digital public reports, insurance companies are now digging even deeper to assess risk.
How Life Insurance Companies Get Your Data
Most life insurance companies avoid pulling public reports directly.
Instead, they get a “risk classifier score,” along with the general reason for the score, from a third party called LexisNexis.
LexisNexis pulls public reports from different agencies throughout the country and assembles them in one central location.
State, federal, and county databases, background reports, and soft credit checks provide much of the information contained in the reports.
Here’s What Data Gets Pulled From These Reports
What is different about these reports is the depth in which they go into your financial background.
Companies look at a combination of your history, including:
- Short sales
- How many times you have moved
- Credit score
- Property ownership
- Professional licenses
- Weapons license
- Controlled substance license
- Business affiliations
- Employment history
- Deed transfer data
- Address history
- Voter registrations
- Tax liens
How much weight each company places on each piece of data varies.
As life insurance companies begin using LexisNexis, they might find that using all of the data is too restrictive — they are not able to give enough approvals.
In response, they modify their use of the data, choosing which reports are to be used in determining the risk classifier score so that they can approve the desired number of applications.
However, data from a recent study by SCOR, a global insurance company focused on “the art of science and risk,” suggests the LexisNexis Risk Classifier is a strong indicator of mortality.
SCOR applied the Risk Classifier model to life insurance, entering data like age, gender, and income into the equation to see how the data source could benefit underwriters.
Creating a simulated pool of life insurance applicants with varying risk factors, SCOR found the Risk Classifier was a highly accurate indicator of the risk of mortality.
They also found the tool to be highly adaptive, meaning insurers could tweak it to meet their unique underwriting standards.
How Carriers Rate Your Risk Based On The Data Received
LexisNexis looks at several different factors and comes back with a score.
Exactly what it checks to form what it calls an “electronic inspection report” varies.
LexisNexis is not a free service. The more comprehensive the data, the more expensive it is.
One insurance company might choose to use every available report when requesting a risk score, whereas another company will use just a few — and that can make an insurance agent’s job that much more difficult.
It is important to note life insurance companies look at many reports, not just your credit report or LexisNexis risk score.
Those are only two of many data points that can be used in determining the price for your insurance.
How much weight your financial history plays in the cost of your policy varies from one insurance company to the next.
Agents like to ask applicants what their approximate credit score is so they can make a recommendation on which company might give them the best price.
If you don’t know your credit score, it is a good idea to find out what it is before applying for life insurance.
What To Do If Your Rates Go Up Due To Financial History Or Credit
It is frustrating for applicants (and agents alike) when a healthy person gets a higher rate because of something like a foreclosure in the past ten years.
Ask your agent why the increase in price happened. Often, the insurance company provides only a general reason for the increase, but your agent should be able to get more details.
In a case where an applicant gets a higher price because they had moved three times in the past seven years, speaking to the insurance company can have the decision reversed.
In another case, a client had a foreclosure five years ago. The insurance company knocked the person’s health class from Preferred to Standard and charged double the price.
Here’s How Much Your Personal Finances Can Impact Your Rates
Insurance companies determine the cost of your life insurance policy based on your “health class,” not just your health.
The better your health class, the lower the price of the plan.
Your credit score is often factored in when the insurance company determines your health class, so even if you are in excellent health, a low credit score can double the cost of your life insurance.
Take, for example, a $500,000, 20-year term insurance policy:
- A 30-year-old male with a “Premium Plus” health class costs $20 per month
- A 30-year-old male with a “Standard” health class costs $40 per month
The table below shows what might be seen in terms of credit scores affecting health classes:
|Credit Score||Possible Rating|
|Above 700||Preferred Plus|
If you have a credit score below 650, it might be best to apply with an insurance company who does not check financial history or use LexisNexis.
Not All Companies Check Financial History and Credit Scores
The good news is that, no, not all companies use financial and background history to determine an applicant’s health class.
When applying, be sure to ask if the insurance company will check your background report or use LexisNexis in the underwriting process.
Here’s a quick list of companies who do not check financial history as part of their underwriting process for term life insurance:
Most Types of Life Insurance Require the Data Check (Not All)
If you are applying for a smaller final expense policy (under $50,000 in death benefit), most companies will not run a background or credit check.
At our agency, we mainly sell no exam life insurance policies.
For this type of policy, since the insurance company bypasses the medical exam, it relies instead on public reports such as the MIB report and Motor Vehicle Department records to determine the company’s risk.
Although companies who offer immediate-decision and simplified-issue plans weigh this data significantly, the final decision regarding an applicant’s risk is often at the discretion of a human underwriter.
The number one reason an application goes to an underwriter instead of getting approved instantly is the applicant’s LexisNexis score.
A full list of the reasons these applications go to an underwriter (or get declined) are:
- LexisNexis risk report
- Pharmacy report (medications)
- Request for physician reports
- Questions/clarification on medical history
- ID verification
- History of multiple applications with other companies
- Confirmation of insurable interest of the beneficiary
- Driving records
Get a Free Copy of Your Credit Report Before Your Apply
According to the Federal Trade Commission, you are entitled to receive a free copy of your credit report from each of the three nationwide credit reporting companies every 12 months.
To get your free credit reports, order online from the only website authorized by federal law — AnnualCreditReport.com, or call 1-877-322-8228.
You will need verify your identity by providing your:
- Social Security number, and
- Date of Birth
Protect yourself by working with an experienced independent agent.
Just because you have bad credit, or had bad credit in the past, does not mean you have to get dinged on your life insurance rates.
Ask an agent — or the insurance company directly — whether they check the financial history of applicants. If an agent does not ask about your credit history, be proactive.
While some companies might not seem to have the cheapest rates on the surface, choosing one that avoids checking your financial history could save you from paying double what you should.