Do life insurers check your credit?

Some do, but not in the way a lender does. A number of life insurers use credit-based information, often as a mortality score from a data vendor, as one input in accelerated or other underwriting, and some use financial records to check that a large policy fits your income. Insurers generally do not use your credit score to decide that you are a bad credit risk; they use credit-related data as a statistical predictor of mortality, a practice regulators watch closely.

Two different uses of financial information

It helps to separate two things that both get called "checking credit."

Financial underwriting. For large policies, insurers ask whether the amount is reasonable for your income, net worth and purpose, because coverage far beyond a person's need raises concerns about insurable interest: who can buy life insurance on whom and misuse. This can involve income documentation or tax returns, and sometimes bankruptcy or judgment records. It is about the size of the policy, not your health.

Credit-based mortality scores. Some insurers buy a score that is built partly from credit-file attributes and has been tested against mortality or lapse outcomes. The vendor's own materials describe such scores as aiming to predict relative mortality risk. For example, Munich Re describes its TrueRisk Life Score as a proprietary algorithm that includes credit information to predict relative mortality risk, on a 1 to 100 scale where lower is better (Munich Re). Other data vendors offer risk scores that combine public records, driving records and credit attributes. A vendor's claims about predictive power are claims by a seller, and insurers are advised to validate them against their own experience.

Insurers use these scores in different ways. A score may let a low-risk applicant skip an exam, nudge a borderline case toward a better class, or flag an applicant for fuller review. How much weight a score gets, if any, is the insurer's choice and is not usually published.

The legal framework

Credit-based data from a consumer reporting agency is regulated under the federal Fair Credit Reporting Act (FCRA). In summary:

• A company may obtain a consumer report for insurance underwriting involving the consumer, which is one of the "permissible purposes" the statute lists.
• If an insurer takes an adverse action based in whole or in part on a consumer report, such as declining you or charging more, it must tell you, name the reporting agency, and tell you that you can get a free copy and dispute errors.
• You have the right to dispute inaccurate information with the reporting agency.

The FCRA is the same law that covers your MIB and prescription-history reports; see how life insurance underwriting works, The MIB report: what insurers know about your history and how insurers check your prescription history. Whether and how a particular state limits the use of credit information in life insurance varies, and state insurance departments are the authority. Rules for auto and homeowners insurance, where credit-based insurance scores are more widely used and more regulated, are separate and do not carry over to life insurance.

Why it is debated

Supporters, including data vendors and insurers, say credit-related attributes reflect long-run behavior, may stand in for health and lifestyle factors, and can let insurers approve more people faster without invasive tests.

Critics, including some consumer advocates and regulators, raise questions about fairness. Credit data may reflect income and wealth differences, so a score used for mortality could affect some groups more than others. Consumers may not know such a score was used. They also point out that credit files contain errors.

Regulators have responded with oversight of data and models in general. Colorado's Regulation 10-1-1 for life insurers applies to external consumer data and information sources, and its definition expressly lists credit scores, along with risk scores derived from such data. Insurers that use them must keep a governance framework and test for unfair discrimination (Willkie Farr & Gallagher summary, September 2023). The AI and data in life insurance underwriting guide explains those rules; for any other state, check its current requirements.

Does it hurt your credit score?

Underwriting requests are typically made as soft inquiries, which do not lower your credit score. A hard inquiry is what happens when you apply for credit. Since practices vary, you can ask the agent or insurer whether credit-based information will be pulled and under what authorization.

What you can do

1. Ask at application. Ask whether the insurer uses credit-based or consumer-report data, and read the authorization you sign.
2. Get your credit reports. Federal law gives you the right to a free report from each nationwide credit bureau, and errors in a file can be disputed. Fixing an error before you apply helps in any context.
3. If you get an adverse decision, read the notice. It should name the source of any consumer report that played a part. Request your free copy within the period the notice gives, and dispute anything wrong.
4. Compare insurers. Underwriting practices differ. A company that uses a data score may reach a different answer than one that does not. See Declined for life insurance? What to do next if you were turned down.

A hypothetical case

Say an applicant in her 30s buys a modest term policy through an accelerated process. The insurer pulls prescription history, the MIB and a vendor score that includes credit-file attributes, and offers coverage without an exam. If one of those inputs had an error, the offer might have been different. This is why checking your reports matters, and why the adverse-action notice is useful. The scenario is illustrative, not a description of any insurer's process.

Key takeaways

• Insurers separate financial underwriting, which tests whether a policy size fits your income, from credit-based mortality scores.
• Some insurers use scores that include credit attributes to predict relative mortality, usually as one input among several.
• Credit data from reporting agencies falls under the FCRA, giving you notice, access and dispute rights after an adverse decision.
• Regulators are examining the fairness of external data, with Colorado's life insurance rule as an early example.
• Check your reports for errors and ask insurers how they use consumer data.