How Insurance Companies Use Digital Records to Determine Premium Rates

Qualifying for life insurance means you’ll undergo a deep dive by insurers into your credit reports and driving records – two tools used by insurance companies to determine how a consumer is rated – but those are hardly the only records companies use as tools. The good news is that a poor credit score and a history of moving violations won’t necessarily preclude you from finding life insurance, but the experts say those past missteps might end up costing you more in premium payments.

Jack Dewald, chairman of the board for the Life and Health Insurance Foundation for Education, says while a credit report may be used to verify the accuracy of an individual’s application, a driving record is used to determine any risky behavior by the applicant.

“They’ll be checking for instances of issues with your driving record, to determine if you take chances while driving,” Dewald says.

Where do you rank?

Your size: 
Your height and weight may increase your life insurance rates. As a group, according to McGill’s Life Insurance, people who are overweight have a mortality rate that is 25 percent higher than those who are not.

Your health: A medical examination may be necessary to determine how healthy you are, which includes blood, heart, and lung tests as well as a urinalysis.

Your history: 
This includes details about past habits, environment, insurance status and health records. Other issues include drug use and insurance denials.

Your family history: If your mother or father has a health condition, insurance companies may scrutinize the possibility that you have the same health condition based on heredity.

Your job: If you have a hazardous job and work in a dangerous environment, insurance companies will charge more for the risks this may pose to your mortality. This includes aviation, which may result in an extra premium. This can also include military service.

Your gender: Women live longer than men, so they typically get lower life insurance premiums. One of the reasons is because women are often more vigilant about their health and get regular checkups.

Your morals: If you’re divorced, have been involved in marital infidelity or unethical business practices, gamble or have a history of substance abuse, this could earn you a higher rate for insurance.

Your economic status: This is based on the need for insurance. Your income level, in addition to estimating the possibility that one might lapse on a policy, often determines the amount of insurance one “needs” during the application process.

Your hobby: If you skydive, rock climb or scuba dive, you will be charged a higher rate of insurance based on the risks these hobbies pose.

Source: McGill’s Life Insurance, 7th. Edition

To get the preferred best rates, a consumer would need to have a clean driving record with no DUI’s, DWI’s, reckless driving charges, excessive speeding tickets or license suspensions.

Cyber Drive Illinois said drivers caught under the influence and charged with a DUI are required to purchase high-risk insurance costing about $1,500 per year for three years total.

The length of time a driving record needs to be clean will vary by company and by state. Typically, Dewald says, for an individual to be considered for the preferred rates he or she would have no DWI charges for at least five years, and any reckless driving charges or excessive speeding tickets for at least three years.

Linda Lankowski, a member of the American Academy of Actuaries Life Products Committee, says insurers use information obtained from these reports to identify a pattern of abuse by a potential client.

“For people with a good driving record, we assume they are nice stable people,” said  Lankowski. “Those are the kind of people insurance companies are comfortable insuring.”

People who have a habit of speeding or who have been charged with offenses such as DWI are exhibiting a pattern of risk. While insurance companies will insure people with higher risks, they are going to charge higher rates to cover the amount of risk they are taking on.

“Certainly you don’t want to put somebody who takes a lot of risks into the same classification as somebody who doesn’t take a lot of risks,” said Lankowski. “They need to distinguish the difference.”

As for credit reports, she said the information is used more often to verify the overall financial picture of an applicant. Insurers typically don’t want to sell a multi-million dollar policy to an individual earning minimum wage.

Variables found in a credit report are used to estimate an individual’s insurance score. This includes how well you’ve met your credit obligations, how many accounts you’ve opened, use of credit, types of credit used and credit history, according to the Insurance Information Institute.

When an insurance company pulls a credit report, they use the information to calculate points on your insurance score. If you have good credit, points are added, if you have wage garnishments or tax liens points are taken away. The higher the points the better the premium.

Insurers, Lankowski says, are looking at the total financial picture of an applicant – how much coverage does a person need, does that person have enough financial means to purchase insurance, how much assets are involved, etc.

Experts say it is important for consumers to shop around, especially if one company has denied them coverage.

Lankowski says to ask the company why coverage was denied, and if something cannot be worked out, to seek a different company better-suited handle the risk associated with the reason for rejection.

Dewald says it is in the best interests of an insurance company to find a way to provide insurance as processing an application costs several hundred dollars for an insurer.

“They’re not trying to figure out how not to insure people, they want to assess the risk and apply the appropriate premium,” Dewald says.

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