Does Your Credit Score Impact Term Insurance Premiums?

Understanding Credit Scores in India

Your credit score is typically between 300 and 900, derived from different factors such as repayment history, credit utilization, the age of credit accounts, and outstanding debts. A high credit score indicates financial stability and responsibility and ensures you get loans and credit lines at favorable rates and terms. On the other hand, a low score signals higher financial risk, often leading to loan rejections or higher interest rates.

India has different credit rating agencies such as CIBIL, Experian, Equifax, and CRIF. CIBIL’s report is often considered synonymous with credit ratings. Since your financial transactions are linked with PAN and Aadhar, these agencies fetch information digitally and have their own criteria to generate scores. Besides credit cards and loans, a credit score is used in areas like employment screening, housing agreements, and potentially even insurance premium calculations.

Common Factors Affecting Term Insurance Premiums

Here are the most common factors that eventually decide term insurance premiums:

Factors Affecting Term Insurance Premiums

The Link Between Credit Scores and Insurance Premiums

Here are a few points that describe the relationship between credit scores and insurance premiums:

1. A high credit score is an indication of financial responsibility. It shows that the individual has been disciplined in repaying loans and has diligently used credit.

2. If an individual has too low a credit score, it will show that the risk assumed by the insurance company shall be higher. If the credit score is consistently low or poor, it might suggest poor financial habits or instability, prompting insurers to classify such individuals as high-risk.

3. If the credit score is high, it means that the chances of defaulting on premiums or making fraudulent claims (on the part of the customer) shall be low, something preferred by an insurer.

4. Using credit scores for calculating motor insurance premiums is quite common in motor insurance (worldwide). However, in India, this practice is still evolving. In the future, insurance companies might consider factoring this as part of their underwriting processes.

Tips to Improve Credit Score

Here are a few things you can do to improve your credit score:

1. Always pay your bills and EMIs on time. This has a direct impact on your credit score.

2. Do not exceed credit utilization by more than 30% of the prescribed amount. For instance, if your credit card limit is ₹5,00,000/- do not use more than ₹1,50,000 in a month.

3. Regularly monitor your credit report and look for any errors.

4. Do not make a lot of credit inquiries within a short span of time, which can hamper your credit score.

Summing up

Having a good credit history and financial discipline results in getting a high credit score. If you are looking for a new line of credit, such as a credit card or loan, having a good credit score is of utmost importance. An insurance company might want to evaluate risk while underwriting an insurance policy. For an individual, a credit score is the best indicator of creditworthiness and financial discipline.

By demonstrating financial responsibility through timely payments and low credit utilization, individuals can potentially lower their term insurance costs, ensuring both financial security and affordability.

FAQs

Does a credit score affect term insurance premiums in India?

While not a standard practice in India yet, some insurers may consider credit scores during underwriting to assess financial risk.

What is the ideal credit score for affordable insurance premiums?

A credit score above 750 is generally considered excellent and may improve your eligibility for better financial products, including insurance.

Can a poor credit score result in term insurance rejection?

While a poor credit score alone is unlikely to cause rejection, it may lead to higher premiums or stricter scrutiny during the underwriting process.

How can I improve my credit score to lower my term insurance premiums?

Paying bills on time, keeping credit utilization low, and regularly monitoring your credit report can help boost your credit score.