Life insurance does not directly affect your credit under any circumstances. Life insurance companies do not report payment history to credit bureaus. It is not a factor in your score. While there is not a direct effect, you can leverage a life insurance policy to your benefit in a number of ways to maintain a good credit score.
Can Any of These Circumstances Change your Credit Score?
Here are the common questions you may have about a life insurance policy affecting your credit, with some further explanation. First and foremost, life insurance companies do not report payment history, or even the fact that you own a life insurance policy to any agencies.
- If you fail to pay a life insurance premium can it affect credit? – No under no circumstances are you obligated to make payments to your life insurance company. Be warned that the consequence of not paying is that the policy will lapse and you will lose coverage, even though it does not hurt your credit score. Even if your policy lapses, the life insurance company does not report it to credit agencies, and credit agencies do not care as it is not part of their credit score equation.
- If you successfully pay for years will it make a positive change to credit?– No credit agencies do not care if you have successfully made payments and kept your policy in force, even if you have been making payments for decades. While this may seem unfair, it is reality and reporting agencies are not interested in your payment history.
- If you take money out of a life insurance policy as a loan will that affect your credit?– No, a life insurance company will not let you take more money out in a loan than you have in cash value, so they are not extending you credit. In a way, a life insurance loan is you extending yourself credit through the insurance company. In any event, you don’t need to worry about a loan changing your credit score.
Indirect Ways Life Insurance Can Help You Maintain Good Credit
Even though your payment history does not have any impact on your FICO score, having a life insurance policy can indirectly help you maintain good credit and financial health in a number of ways. Some of the top ways are:
Using Cash Value During Hardships
If you have a permanent life insurance policy, you probably know that it has a cash value. Fortunately, there are ways for you to access this cash even while the insured person is alive. Money can be taken out in a loan or a partial surrender. If you experience any type of financial hardship such as losing a job or having unexpected bills come up, you can use the cash value to pay bills and maintain good credit. You do not need to provide any reason to the life insurance company for taking money out of a policy. It is yours to do with as you wish.
Reducing Balances on Credit Cards
In the same way that you can use the cash value to pay bills, you can also reduce balances on your credit cards with a policy loan or withdrawal. This has a couple of positive benefits. The first is that it reduces the balance owed on your credit report. Even though you now owe that money to your life insurance company, it does not count against your ratio of utilized debt to available debt. This can instantly increase your credit score if you have high balances on cards. The second benefit is that life insurance loans typically have a much lower interest rate than a credit card loan because the life insurance loan is collateralized by your cash value and the credit card is uncollateralized. Swapping out higher interest rate credit card balances for lower rate life insurance loans can help you pay them back and reduce your overall debt more quickly. In fact, you don’t really even need to view a life insurance loan as debt because credit bureaus do not.
Permanent Life Insurance is an Asset on your Personal Balance Sheet
If you are applying for a loan or mortgage, the lender will look at your assets and liabilities. A permanent life insurance policy is considered an asset because it has a cash value. If the cash value is substantial, they will view it as a way to make loan payments during times of financial strife. Owning assets like this will help you get a mortgage or other loan. Getting that loan is useful to you, and paying it back improves your credit score.
Your Beneficiaries Can be Comfortable with Death Payout
While this is a worst case scenario, if people depend on you financially and you pass away the death benefit will protect them financially. For instance, many times after a spouse dies without life insurance, the surviving spouse struggles to pay bills. Their credit score suffers, as does their finances. The fundamental purpose of life insurance is to protect your beneficiaries from this scenario. In this way, life insurance can help to maintain the good credit and financial standing of your family.
