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what is face value of life insurance?
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 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 policy: 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 policy, such as whole life insurance, also include a cash value.
Types of life insurance
There are two major kinds of life insurance: term and whole. The biggest difference is how long they last, although there are some smaller differences like premium rates and loan options.
Term life insurance: Term life coverage provides protection for your family for a period of time and then ends. It lasts a certain number of years—usually 10, 20 or 30—or until you reach a certain age—say 80 years old, and it tends to be cheaper than whole life. If you pass away during the term, your beneficiaries may get the money from your death benefit. People often choose term life so that their family is covered during the period of time when they expect their bills and expenses to be at their highest—for example, while kids are going to school and college.
Whole life insurance: Whole life coverage lasts—you guessed it—your whole life, as long as you keep paying your bill. When you pass away, your beneficiaries may receive the death benefit payment. People often choose whole life insurance because they want to be certain their families will be covered no matter when they die and because the price they pay for whole life insurance doesn’t go up as they grow older. Most whole life insurance policies accumulate cash value, unlike term, so you sometimes have the option to take out a loan against it if you need to.
If you already have a term policy and are reaching its end, it may be possible to convert it to whole life so you aren’t left without life insurance if you outlive your policy.
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.
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.
Types of Term Insurance
- Renewable Term. Renewable term plans give you the right to renew for another period when a term ends, regardless of the state of your health. With each new term the premium is increased. The right to renew the policy without evidence of insurability is an important advantage to you. Otherwise, the risk you take is that your health may deteriorate and you may be unable to obtain a policy at the same rates or even at all, leaving you and your beneficiaries without coverage.
- Convertible Term. Convertible term policies often permit you to exchange the policy for a permanent plan. You must exercise this option during the conversion period. The length of the conversion period will vary depending on the type of term policy purchased. If you convert within the prescribed period, you are not required to give any information about your health. The premium rate you pay on conversion is usually based on your “current attained age”, which is your age on the conversion date. This type of policy often provides the maximum protection with the smallest amount of cash outlay.
Types of Term Insurance
- Level or Decreasing Term. Under a level term policy the face amount of the policy remains the same for the entire period. With decreasing term the face amount reduces over the period. The premium stays the same each year. Often such policies are sold as mortgage protection with the amount of insurance decreasing as the balance of the mortgage decreases. If the insured dies the proceeds of the policy can be used to pay off the mortgage.
- Adjustable Premium. Traditionally, insurers have not had the right to change premiums after the policy is sold. Since such policies may continue for many years, insurers must use conservative mortality, interest and expense rate estimates in the premium calculation. Adjustable premium insurance, however, allows insurers to offer insurance at lower “current” premiums based upon less conservative assumptions with the right to change these premiums in the future. The premium, however, can never be more than the maximum guaranteed premiums stated in the policy.
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?
Reduction upon request
Insurers 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) decrease 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.1
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 costs 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 Can Cause Face Value to Change?
There are many events that can trigger a change up or down in the face value of a policy.
On the plus side, the cash value can grow large enough that it actually causes a corresponding increase in the face value of the policy.
On the minus side, unpaid loans taken from the policy balance by the policyholder will be deducted from the policy’s face value.
Any potential change in the face value of the policy will be addressed in the terms of the policy.
The key thing is to determine how big a face value to buy. To calculate it, start off by asking yourself these questions:
- How much money will my spouse and children need to maintain their current quality of life?
- So, How much will they need to pay my debts, taxes, and other estate-related costs?
- And How much will my favorite charities need to replace my donations?
- Next, figure out the maximum length of time the coverage would be needed. For example, if your youngest child is two years old now, you’d want to make sure they have a sufficient income through college. That’s another 20 years.
It may be more cost-effective to use several policies of different face amounts and guarantee periods to cover these various needs. Or, it may be simpler to have one big fat policy to cover everything.
What Is the Difference Between Face Amount and Death Benefit?
The death benefit is the payout that the life insurance company makes to your beneficiaries. When you first take out a life insurance policy, the death benefit and the face amount are the same. Sometimes, death benefit and face amount remain the same throughout the life of the policy. However, they can differ from one another in some circumstances.
What Is the Difference Between Face Value and Cash Value?
The cash value refers to how much a permanent life insurance policy is worth. With whole life and other permanent life insurance policies, a portion of monthly premiums is put into a cash account or investment. The money usually earns interest over time, and gradually, the policy becomes worth money. Cash value is the term that represents how much a permanent life insurance policy is worth. Term life insurance policies don’t have any cash value.
Face value is the initial amount of the death benefit that the insurance company promises to pay your beneficiaries.