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Buying a life insurance policy can be complicated, so it is a good idea to learn about the terms you may see on your policy. One common phrase is “face value.” The face value of life insurance is generally the amount that beneficiaries will receive when the policyholder dies. It’s sometimes also called the death benefit, face amount or coverage amount. It’s not the same thing as cash value, however. Understanding these terms can give you a better sense of what your policy covers and how it will benefit your heirs.
What is the face value of a life insurance policy?
In short, the face value of life insurance is the amount of money that a policyholder’s beneficiaries will receive from the insurance company when the policyholder dies. If you’ve purchased life insurance, the face value should be listed on your policy (likely under policy benefits) as a specific sum. If you have any trouble locating this information, you can call your insurer for help.
What is face value vs. cash value of life insurance?
When it comes to life insurance, a policy’s face value versus cash value can be a little confusing, especially since the two components are similarly named. But these are two separate things. To better understand, it helps to know that there are two general types of life insurance:
- Term insurance: This type of policy lasts for a predetermined number of years. Premiums are used to fund one primary benefit: the face value (aka death benefit).
- Permanent insurance: This type of policy lasts the life of the policyholder, as long as they pay the premiums. It features a face value (just like term insurance), as well as a cash value. The cash value component is a portion of the premium that the insurer places in an interest-bearing account. Whole life and universal life insurance are popular types of permanent insurance.
If you have a term life insurance policy, its face value is what your beneficiaries will inherit upon your death. The benefit amount generally does not change from the amount you decided on when you purchased the policy. Unlike permanent life insurance, term policies do not have a cash value.
If you have a permanent policy, its face value is also what your beneficiaries will inherit upon your death. The cash value is an additional nest egg of money but will not alter the face value of your policy unless you borrow against it and fail to pay the money back, which would decrease face value.
Cash value accumulates slowly as you pay your premiums but does not increase your death benefit or, thus, the face value of the policy. The way in which cash value generates interest will vary depending on the type of policy you purchased. For example, it could be invested in stocks or bonds.
Although it will not increase the face value of the life insurance policy, cash value can be useful to policyholders in a few ways, including:
- Premium payment: If the cash value is substantial enough, you may be able to 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 the 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 the policy’s face value.
- Surrender value: If you choose to surrender your life insurance, you may receive the cash value of your policy in a lump sum. You’ll lose its face value, though, leaving your loved ones without this benefit when you pass away.
To sum it up, the cash value of a permanent policy will not add to its face value, but can be useful in other ways. Remember that if you use the cash value for any purpose during the life of the policy — such as a loan you don’t fully pay back — your death benefit will be reduced by the amount of the outstanding loan balance, which will in turn reduce the face value of the policy.
What should the face value of your life insurance policy be?
You may wish to have a policy with a high face value in order to more adequately provide financial support for your beneficiaries. But keep in mind that the higher your policy’s face amount, the more you’ll likely pay for it. Picking the right face value comes down to balancing your loved one’s future needs and your current budget.
Insurers will generally cap a policy’s face value at a certain amount based on factors such as 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, while a 60-year-old might only be able to get a face amount worth 10 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 their policy’s face amount.
Ultimately, the right face value for you will depend on:
- Your salary
- Your outstanding debts, like a mortgage
- The anticipated financial needs of your partner/spouse or children with special needs
- The total number of dependents you have
- The likelihood your children will need money for their education
Determining the appropriate face value for your circumstances may require research and careful thought. Bankrate’s insurance editorial team has collected tools to help you make the right decision, including a life insurance starter guide and calculator.
What causes face value to change?
Generally, a policy’s face value won’t change. You’ll choose the face amount that’s appropriate for you when buying your policy, and it’ll stay at that level until you pass away, at which point your beneficiaries receive that amount of money.
However, a few things can alter the face value.
Using a rider
A rider (also called an endorsement) is additional coverage that can be added to a life insurance policy. Some riders allow policyholders to tap into the policy’s face value while they’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 will be subtracted from the policy’s face value, reducing the death benefit your loved ones receive when you pass away.
Cash value growth
Again, it’s important to note the distinction between cash value and face value. In most cases, any cash value that is left in your permanent insurance policy on your passing will be absorbed by the insurer. It does not get added to the face value.
So, simply put, your beneficiaries do not receive the face value plus the cash value; they only receive the face value. This is true of most policies — but not all. A few insurers offer an endorsement that does include both cash and face value in the amount paid to the beneficiaries. These endorsements are rare, however, and adding one to your policy may increase your premium.
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 the outstanding loan amount from the policy’s face value at the time of your death.
Frequently asked questions
In most cases, selecting a higher face value policy will result in paying more for life insurance. One way to help minimize premiums is by asking for quotes from several insurers for policies with the same face value to see which company offers you the lowest price. Since insurance quotes are free, gathering a handful is a great way to make an informed choice.
The best life insurance company will vary from person to person. Your age, your family’s needs, your health and several other factors impact your life insurance needs — and the best company to meet them. But some life insurance companies may offer better products and services; others may offer lower premiums. Experts recommend shopping around with several insurers and speaking with an insurance professional to determine what’s best for your situation.
These terms are often used interchangeably. Another term that means the same thing is coverage amount. All these terms refer to the amount of money that will be paid to the beneficiaries upon the policyholder’s death. So, for example, a policy with a face value of $500,000 means that this is the amount that will be given to the beneficiary (or shared by all beneficiaries if there is more than one).
You can call your insurance provider to ask about increasing the face amount of your life insurance policy. In some cases — for example, if your salary has significantly increased since you bought your coverage — they may be willing to adjust the policy. But this might require an entirely new underwriting process, meaning you might need to get a medical exam again. And your premiums will likely go up, too. If your insurer won’t increase the policy’s face value and you want more coverage for your loved ones, you can also purchase a separate, additional life insurance policy.