When you’re buying life insurance, you might feel like you need a glossary just to even start the process. Even the best life insurance companies use industry lingo that can make buying a policy feel overly confusing.
As you’re shopping for coverage, for example, you might be wondering, what is the face amount of life insurance? Also called face value, the face amount of your insurance policy is arguably the most important component of your coverage.
So it’s pretty critical that you understand what face value means, and can differentiate between face amount vs. cash value.
What is the face value of a life insurance policy?
In short, your face value is the amount of money your beneficiaries will receive from your insurance company at the time of your death. You might hear it called your death benefit, coverage amount, or face amount. So when you buy life insurance, this is what you’re paying for.
So what is the face amount of the life insurance policy you have? If you haven’t used any of your cash value (more on that in a minute), you don’t need to do any calculations to find out.
Simply put, the life insurance face value also called the death benefit — is the amount that your beneficiary will receive when you die. If you purchase a policy for $100,000, for example, that amount is the face value of your policy, and that’s the amount that your beneficiaries will receive if you should die while the policy is in effect.
Face value is different from the cash value. Cash value is the amount you receive from some policies if you surrender the policy early. But this is only true for permanent forms of life insurance.
There are two primary types of life insurance policies: term and permanent. Term insurance has a face value, but no cash value; you won’t receive a payout if you surrender the policy before the term is over.
Permanent policies, however, include both the death benefit as well as a savings component, where part of your premium is placed to earn interest. That savings account constitutes the cash value.
If you decide to give up or surrender the policy, you will receive this amount back. It’s also the amount against which you can borrow from your policy.
To summarize, all life insurance policies have a face value or death benefit. But only permanent types of policies, such as whole life insurance, also include a cash value.
Your policy benefits should list your face value as a specific sum. If you’re not sure about the face amount of your policy, read it through. The face value should be easy to find, but if you have any trouble, call your insurer.
If you’re paying for a life insurance policy, you definitely want to know the amount of money your loved ones will get when you pass away.
About the Face Value of Life Insurance
To calculate the full benefit that will be paid out to beneficiaries in the event of the insured person’s death, consult the schedule of benefits in the policy.
Most life insurance companies also offer riders, which are additional benefits that can be included in a plan. For example, some riders stipulate that the face value doubles if the insured dies due to a specific type of accident.
The face value plus the value of any additional benefits constitutes the policy’s total death benefit. In most cases, the face value of life insurance is transferred to the beneficiaries tax-free.
How Face Value Influences Cost
Face value is one of the most important factors that contribute to the cost of a life insurance policy. Permanent policies have both a face value and a cash value, while term policies (which are less expensive up-front) only carry a face value.
For example, a person who seeks to buy a term life insurance policy from Company XYZ would expect to pay more for a $500,000 face value policy than for a $100,000 face value policy.
We mentioned that using your policy’s cash value can impact your face value. The life insurance face value vs. cash value conversation can feel a little confusing, especially since these two policy components are so similarly named. But you should know that these are two separate things.
Let’s look at the face amount vs. cash value. The face value/face amount is, as we’ve said, your death benefit. It’s the amount of money you picked for your beneficiaries to get when you bought your policy. It’s (generally) a fixed number.
If you buy a permanent life insurance policy, your coverage may also come with a cash value component. This is completely separate from your face value.
When you pay your premiums, your insurance provider puts some of that money into a separate account for you. That money might earn a steady rate of interest or get invested, depending on the type of policy you chose.
Your cash value can be useful to you in a few ways, including:
- Premium payment: If that cash value gets big enough, you can usually use it to pay your life insurance premiums.
- Loan collateral: At a certain point (e.g., after a set number of years), you might be able to borrow against your cash value. You’ll usually get a low interest rate with this loan, but you’ll need to pay it back before you pass away or your insurer will deduct the outstanding loan amount from your face value.
- Surrender value: If you choose to surrender your life insurance policy, you can get the cash value back as a lump sum. You’ll lose your face value, though, leaving your loved ones without this benefit when you pass away.
What should my face value be?
Now that you know the difference between the face value and cash value of your life insurance policy, you’re ready to make an informed decision about the right face value for you.
You might think you want to get a policy with a huge face value, but you should know that the higher your policy’s face amount, the more you’ll pay for it.
So, really, picking the right face value comes down to balancing your loved ones’ future needs against your budget right now.
Plus, insurers will generally cap your face value at a certain amount based on things like your age and your salary. A 20- or 30-year-old might be able to get a policy with a face value that’s roughly 50 times their salary right now, for example, while a 60-year-old might only be able to get a face amount worth ten times their current salary.
That’s because insurers assume younger people will live longer, meaning the insurance company can make more money off their premiums to cover that face amount.
Ultimately, the right face value for you will depend on things like:
- How many dependents you have
- Your salary
- Whether or not you want to pay for your kids’ college, if you have children
- Your outstanding debts, like a mortgage
To help you figure out the right level of face amount insurance coverage for your needs, we have a starter guide and a calculator.
How the Face Value of a Life Insurance Policy Works
The face value can be thought of as the starting point for the death benefit—it establishes the death benefit at policy issue and, therefore, the premium. But both the death benefit and face value can sometimes change during the policy’s term.
When the Face Value (and Death Benefit) Changes
Here are some examples of when the face value, and death benefit, might change:
- Insurance companies will frequently reduce the face value upon request since this doesn’t increase their liability or exposure to risk. However, increasing the face value often requires that you reapply for the additional amount of coverage.
- Decreasing term life insurance: This is a type of term life insurance in which the face value (and death benefit) decreases at regular intervals, such as every year, until the policy’s term expires. However, policy premiums remain level throughout the term. For example, a 30-year decreasing term policy could cover the declining principal amount of a 30-year mortgage.
- Guaranteed insurability rider: This rider can be added to a policy at the time of purchase. It allows the insured person to increase the face value, or death benefit, at regular intervals, such as every five years until a certain age, or upon qualifying life events, such as the birth of a child. The key is that they can increase the benefit without providing evidence of insurability—they don’t have to apply or answer medical questions.
- Renewable Term Life Insurance: Many term life insurance policies are renewable once the term expires. The insured doesn’t have to provide additional evidence of insurability, but the new premium is based on their current age (and the health they were in when they took out the original policy). Since the cost of insurance increases with age, some people choose to renew for a lower face amount, which comes with a more affordable premium.
- Variable life insurance: With variable life policies, you can invest the cash value into subaccounts similar to mutual funds. Depending on investment results, the policy’s face value and death benefit may increase or decrease.
- Accelerated death benefit: Accelerated death benefit riders allow the insured person to access the face value of the policy while they’re still living. These riders are generally used to pay for expenses such as the cost of managed home care, long-term care, nursing home care, chronic or critical illness, or disability. But activating these riders reduces the policy’s face amount proportionately.
What causes face value to change?
Generally, your policy’s face amount doesn’t change. You pick that number when you buy your policy and it stays at that level until you pass away, at which point your beneficiaries get that amount of money. In fact, that’s one of the key differentiators between life insurance face value and cash value.
But that said, there are a few things that can alter your face amount, so let’s look at them.
Using a rider
A rider (also called an endorsement) is additional coverage you add to your life insurance policy. And some riders allow you to tap into your face value while you’re living.
For example, you might choose to add a terminal illness rider. That way, if you’re diagnosed with a terminal illness, you can use some of your death benefit for medical care while you’re alive.
But any money you use while you’re living will get subtracted from your face value amount, lessening the benefit your loved ones will receive when you pass away.
Cash value growth
Technically, this doesn’t affect your face value, but it does impact the overall worth of your policy, so it’s worth mentioning.
As your cash value grows, you might feel like your policy is getting more valuable. But remember that there are major differences between the face value and the cash value.
Specifically, it’s important to know that when you die, your insurance provider absorbs the remainder of your cash value unless you have a rider that specifically calls for it to be added to your death benefit (i.e., handed over to your beneficiaries). These riders are rare, so it’s best to assume cash value growth won’t affect your face amount of insurance coverage.
A policy loan
As we’ve mentioned before, if you have a policy with a cash value component, you can probably borrow against it for a low-interest loan. But if you don’t pay that money back, your insurance company will subtract your outstanding loan amount from your face value at the time of your death.
Lying on your application or certain causes of death
When your insurer agrees to pay the face amount to your beneficiaries, they do so under the assumption that you will pass away as the result of an unforeseeable cause.
If you lie on your application (e.g., you don’t disclose a preexisting condition) or you commit suicide, you violate the agreement with your insurer. At that point, they may void your policy — which effectively brings your face value down to zero, leaving your loved ones empty-handed.
Frequently asked questions
How does face value influence my premiums?
The higher your face amount, the higher your premiums. As you’re choosing the face amount of your life insurance policy, get quotes for premiums to make sure your budget can accommodate them.
What is the best life insurance company?
That depends. Your age, your family’s needs, your health, and other factors impact your life insurance needs—and the best company to meet them.
But some life insurance companies offer better products and services than others. To help you compare some of the leading providers, we’ve compiled a list of the best life insurance companies.
How do I increase the face amount of my life insurance policy?
You can call your insurance provider and ask. In some cases—for example, if your salary has significantly increased since you bought your coverage—they may be willing to adjust your policy.
But this might require an entirely new underwriting process, meaning you might need to get a medical exam again. And your premiums will go up, too.
If your insurer won’t increase your face value and you want more coverage for your loved ones, you can also purchase a separate, additional life insurance policy.
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