Key Takeaways
- The face value of a life insurance policy is the amount paid to your beneficiaries when you die.
- Face value is the primary factor in determining the monthly premiums to be paid.
- Cash value is money you can take out of a life insurance policy while alive. Taking out cash value reduces the face value of your policy.
- Your face value could increase if you don’t tap into cash value. Extra rider benefits can also increase the face value.
- The current face value of your life insurance can be found in the policy’s statement of benefits.
What Is Face Value?
The face value of a life insurance policy, also known as the death benefit, is the amount paid to your heirs when you pass away. The face value and future payout can increase or decrease over time, depending on how you manage the policy.
Understanding how to determine the face value and factors that can change it is crucial for ensuring your loved ones receive the intended benefits. Learn how to ascertain the face value of your policy, the impact of cash withdrawals, loans, and policy riders, and how these elements affect your insurance’s overall value.
How Face Value Works in Life Insurance
The initial face value is the amount of death benefit purchased when the policy is issued. The original face value (or face amount) will be stated on the policy itself. In the event of the insured’s death, this is the amount paid to the policy’s beneficiaries. Any scheduled future changes can be found in the policy’s illustration table or benefits schedule.
The face value for mostterm insurance policies remains the same until the policy terminates. However, the face value for a permanent life insurance policy may change as the policy matures. For example, the face value can go up if you buy additional insurance (known as paid-up additions or PUA) or allow dividends to accumulate within the policy. Withdrawals of cash from the policy, on the other hand, will reduce the face value and payout for your heirs. Policy loans from the cash value will also reduce the face amount if they are not repaid before you die.
How to Determine Your Life Insurance Face Value
To calculate the full benefit that will be paid out to beneficiaries in the event of the insured person’s death, start by checking your policy’s most recent statement. You should also check whether your policy contract has any riders, which are additional benefits that can be included in a plan. For example, some riders stipulate that the face value doubles if you die from a specific type of accident.
As your policy ages and more transactions occur, it can become challenging to determine the exact value of your policy on your own. Consult your insurance agent for assistance in determining the precise face amount. Your agent can also help you understand the pros and cons of various options if you need to withdraw cash from your permanent life policy.
Comparing Face Value and Cash Value
The face value is the amount your heirs would receive after you die. Cash value is the amount of money that has accumulated within the policy that you can withdraw or borrow while alive. Cash value will be less than the face value and death benefit of your policy.
Cash surrender value refers to the amount of money you would receive if you stop paying premiums, terminate the coverage, and exchange the policy for cash. The surrender value equals the cash value minus any charges the insurance company levies for early termination, as well as any outstanding loans and loan interest.
Tip
If the cash value is depleted too much, it can reduce the face value well below the original death benefit. Your policy will show what happens as you take out cash value.
The Impact of Face Value on Life Insurance Costs
Face value is one of the most important factors contributing to the cost of a life insurance policy. For example, a term life insurance policy with a $100,000 face value will have lower premiums than one with a face value of $500,000.
Meanwhile, because permanent policies have both a face value and a cash value—and because they last your whole lifetime— their premiums will be much higher than term life policies with the same face value. You’ll pay significantly more for a whole life insurance policy with a $500,000 face value than you would for a term life policy with a $500,000 face value.
Premiums are lower for term policies because you are paying for temporary coverage that accumulates no cash value. Permanent insurance is priced higher to cover the cost of insurance across your lifetime, plus your contributions to the policy cash value. Adding riders that increase your face value (such as cost of living increase riders that raise your death benefit to keep pace with inflation, or guaranteed insurability riders) will also increase your costs.
| Monthly Premium vs. Face Value | |
|---|---|
| Face Value | Monthly Premium |
| $100,000 | $13.38 |
| $250,000 | $20.80 |
| $500,000 | $34.24 |
| $750,000 | $47.59 |
| $1,000,000 | $62.48 |
| $2,000,000 | $112.65 |
Factors Influencing Changes in Life Insurance Face Value
There are many events that can trigger an increase or decrease in the face value of a policy.
On the positive side, the cash value can grow large enough that it actually causes a corresponding increase in the face value of the policy. This can result from dividends that are credited to the policy, which increases the total cash value. Policy owners may also be able to purchase additional insurance (PUA) within the same policy by adding cash or using dividends to increase the face value.
On the minus side, unpaid policy loans taken from the cash value will be deducted from your policy’s face value. If you fail to pay your premiums, the insurance company may begin using the cash value in the policy to cover these payments, reducing both the cash value and the future face value. Finally, if you withdraw cash from the policy, it will reduce the face value.
Is the Face Amount the Same as the Death Benefit?
Not always. The face amount equals the death benefit plus any additional payouts from riders and cash value, and minus any reductions from cash value withdrawals and loans. On basic term policies with no riders, the face amount is the same as the death benefit. For more complicated permanent policies with cash value, the face amount can be significantly different than the stated death benefit.
Can I Withdraw My Cash Value From Life Insurance?
Yes, you can take money out of a permanent life policy. However, doing so will reduce the face value. If you withdraw (surrender) all of the money from a policy, it will terminate and your beneficiaries will no longer receive any payout if you die.
What Is Cash Value Life Insurance?
Cash value life insurance is a form of permanent life insurance that contains a cash value component outside of the death benefit. This value can be accessed via a loan or withdrawal that is kept separate from your death benefit. The cash value portion of the insurance accrues over the lifetime of the policy.
The Bottom Line
You should track the face value of your policy so you know you much your loved ones will receive after you pass away. This calculation can be tricky on policies with rider benefits as well as those with cash value. You can track the face value yourself using your policy statements, but if you’re unsure, contact your insurance agent to get the most up-to-date figure.
Steve Kobrin, Independent Insurance Agent, LUTCF, Fair Lawn, NJ
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?
- How much will they need to pay my debts, taxes, and other estate-related costs?
- 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.
