Let’s take a few minutes today to talk life insurance. When I was an advisor, many people only looked at cost. The key, though, is to compare costs with benefits. Here’s one place people get trapped because they don’t understand subtle differences: life insurance with an exam vs. those without…..don’t make the wrong decision!

Did you know that in some cases, the cost for a life insurance policy with an exam can be about equal to one without an exam? Make sure you know the pros and cons of choosing a no exam life insurance policy before you purchase. Educating yourself can help you select the right thing for you.

No Exam Life Insurance

A life insurance policy with no exam means that you do not need a urine sample or a blood draw in order to get approved. One of the biggest benefits of going this route is that you can get approval very quickly, whereas a traditional policy might take some time to review all your results and present you with your rate. This form of insurance is still underwritten by the MIB and the application procedures are similar.

Underwritten Life Insurance

A key word in life insurance is “underwriting.”

In order to get a policy that has been underwritten, you need a medical exam. This usually requires that an examiner comes to your home to check your weight, height, and to take a urine and blood sample. From there, your results are reviewed and the insurance carrier arrives at a decision to offer you coverage or not. If the carrier has questions, the time to approval might be even longer, especially if a physician’s statement is required to verify your health status.

For someone who is in relatively good health, an approval can come as quickly as within 48 hours. Usually, though, a carrier does not approve a policy until 2-4 weeks later. It might take even longer for someone who is not in good health. The advantage of going this route for someone who is healthy, though, is that the savings over the course of the term period can be significant. Someone who has health issues might prefer to go the route of no exam life insurance.

What About Income?

Another important thing to remember is that it’s going to be difficult for someone on unemployment or studying full time to get traditional exam life insurance because the company sees them as having no income. Without a medical exam, however, income is not a major factor. This makes it easier for someone outside the traditional scenario of a full time job to get life insurance coverage.

Cost

One of the biggest factors in comparing no exam life insurance to medical exam life insurance is cost. While no medical exam life insurance is more expensive, you are getting coverage without the unknown of a medical exam. Imagine that you have not been to the doctor in some time, and when the examiner shows up to do your blood test you find out that you have a blood pressure or cholesterol problem. With this, your rates on your traditional policy could skyrocket or you could even be declined, depending on the severity of the issue. In this case, it makes much more sense to go the route of getting life insurance without an exam because you’re avoiding an unknown or an even higher policy cost.

Set aside a time to talk to an insurance professional to determine whether no exam life insurance is right for you.

Despite the recovering economy, American credit card debt levels are on track to exceed $900 billion by the end of 2015, bringing the average household debt to $7,813, the highest since the Great Recession of 2007 to 2009, according to CardHub. While FICO scores have improved to a pre-recessionary average of 695, which is partly a reflection of consumers being conscious to make fewer late payments, over half of Americans mistakenly think that maintaining a high balance improves their score as long as they pay bills on time, according to a Bankrate Money Pulse survey.

Not knowing how credit scores work can hurt you in ways you may not realize. Here are five reasons you should care about your credit score:

Getting Credit

Most fundamentally, a good credit score enables you to get credit cards and loans, while a bad score limits your ability to secure such financial resources. What constitutes a good credit score varies depending on what scoring system and lender you’re talking about. For popular scoring systems, such as FICO and VantageScore, a good score is anything above 700, a poor score is below 649 and a bad score is anything under 600. If your score falls into the poor to bad range, or even if it’s merely fair, you may have difficulty getting new credit cards or loans. This can be problematic in itself, but there can be a snowball effect with other negative consequences.

Finding Employment

A bad credit score can actually do double damage to your finances by limiting your ability to find certain jobs and obtain credit. The Fair Credit Reporting Act allows prospective employers to obtain your permission to review your credit report before hiring you. This can affect your ability to get jobs in certain industries, such as financial services, explains Vic Tanon of Emplicity, an organization that provides human resources consulting. Employers who notice you have a bad credit score may question your judgment in other areas and take a second look at your application.

Making Purchases

Your credit score can also affect your ability to purchase consumer goods and services. For instance, if you’re visiting T-Mobile’s website to purchase an iPhone 6s, you have to select from a credit range to determine how much you will pay for your up-front device cost. The site’s credit options include: excellent/good credit, building credit or some credit issues, no credit check due to serious credit issues, or a decision to pay the entire cost up-front. In other words, poor credit can result in you having to pay the entire cost at once, whereas good credit lets you spread the cost out over multiple payments. This reflects the fact that suppliers of goods and services are more likely to let you pay off a purchase over time if they know your credit is reliable. Similarly, your credit rating can affect your purchases of services, such as utilities and insurance.

Renting an Apartment or Buying a House

A poor credit score affects your ability to get a mortgage loan to buy a home. Even if you only plan to rent an apartment, a bad credit score limits your renting options. As Credit Karma writer Mike Goldstein explains, a bad score can cause a landlord to turn down your rent application or to impose additional conditions on your lease. In some cases, you may have to find a co-signer or a roommate with better credit. You may also have to put down a larger security deposit.

Starting a Business

Your credit rating also impacts your ability to start your own business. According to a Small Business Trends poll, 60 percent of small business startups say their biggest challenge is lack of funding or insufficient cash flow. To solve this problem, many business owners turn to business loans or lines of credit. Unfortunately, if you have a bad personal credit rating, it can affect your ability to secure business credit, cutting off one of the means to improve your financial situation and fix your credit. To avoid this and other negative consequences that stem from bad credit, keep your balances low and pay your bills on time.

Average Joe and OG hate rules of thumb. Particularly with life insurance. In fact, on a recent Stacking Benjamins podcast, Joe said that his most-hated (and OG’s second most-hated) rule of thumb was the one often spread by the life insurance industry – that you need 10x your income in life insurance.

I think the list was done partially in jest. But if I can interpret their main criticism, I would agree that blanket rules of thumb aren’t helpful for personal finance. Personal finance is – after all – personal.

So, if like Joe and OG, you find yourself looking for a little more insight into how much life insurance you need, read on. Last month was, after all, Life Insurance Awareness Month – so if you missed it (or even if you didn’t….) now is a better time than ever to look at your policies.

The 4 Percent Rule…and Insurance

You may be familiar with the 4 percent “rule” for retirement. Introduced in the mid-1990s by a financial planner, the 4 percent rule tells investors how much of their portfolio is “safe” to withdraw each year without depleting their all-important nest egg. The math behind the calculation says that if you withdrawal just 4 percent of what you have saved and adjust that mount for inflation each year, your nest egg could last more than 30 years (particularly if you leave your equity allocation higher). What we want to do is convert that same principle of the never-ending cash flow to life insurance, and we get a better “rule of thumb” for how much life insurance you need.

How do we do it? Drum roll…

Step 1: Make a hypothetical budget of what the family finances would have to look like to maintain the same standard of living. What does that added income (each month or year) convert to on a daily basis?

Step 2: Take that daily amount and add four zeros to the end. So, $50 daily becomes $500,000 in life insurance; $100 becomes $1 million; etc.

Step 3: Buy that amount.

Let’s think about the math: 4 percent of a $500,000 policy is $20,000 a year. For 365 days, that gives your family $54.79 per day.

Why is this a better “rule of thumb”?

Many times when we in the life insurance industry recommend 10x income, we add in disclaimers that families should also buy enough additional coverage to pay off debt and any major upcoming expenses. So basically, it is 10x your income plus your mortgage.

Oh, and if the kids are potentially headed to college, you should add in that amount as well. And don’t forget to account for the fact that you may have new expenses – like  childcare if a stay-at-home parent is lost. I don’t mean to call into question the intention behind this “rule.” The rule’s purpose is noble, and even $100,000 of life insurance is a million times better for your family than none. However, if we’re talking about a rule of thumb, having all these asterisks involved can often be more confusing than enlightening.

Instead, the “daily living expenses” method takes into account all those factors – the mortgage, continuing the same savings rate, etc. – to give a “clean” recommendation that is personalized to each family. If you calculate what that hypothetical budget would look like without a parent or spouse’s income, it should factor in childcare needs and continuing the same college or retirement savings path. You won’t have to add that in at the end.

Is this method perfect?

No. For instance, if one parent believes they may take an extended period off from work after losing a spouse, that amount still wouldn’t be accounted for in this method. You’d have to add that in.

But I think this “rule of thumb” is still better for one main reason: to find the perfect amount, you have to do more than just look at last year’s W-2 and multiple it by 10. It forces families to have a conversation and think about what is often unthought. And it brings back the personal to personal finance.

Jeremy Hallet is the CEO of Quotacy, an online life insurance agent. Quotacy offers free online quotes and life insurance calculators without requiring any personal contact information. Get your free quote at www.quotacy.com today.