When shopping for life insurance, you may feel like you need a glossary to get the process started. Even the best life insurance companies use industry jargon to make buying a policy feel overwhelmingly confusing.
While shopping for coverage, for example, you may be wondering what the face amount of life insurance is. Also called face value, the face amount of your insurance policy is possibly the most critical component of your coverage. Therefore, you must understand what face value means and be able to differentiate between the face value and 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 may hear it called your death benefit, coverage amount, or face amount. So when you buy life insurance, you’re paying for this.
So what is the face value 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 math to find out.
Your policy benefits must include their face value as a specified sum. If you’re not sure of the face value of your policy, read it carefully. The face value should be easy to find, but call your insurer if you have a problem. If you’re paying for a life insurance policy, you want to know how much money your loved ones will receive when you pass away.
cash value
We mentioned that using your policy’s cash value can affect its face value. The conversation between life insurance face value and cash value can be confusing, especially since these two components of the policy have a similar name. But you should know that these are two different things.
Let’s look at face value versus cash value. The face value/face amount is, as we said, your death benefit. The amount of money you chose for your beneficiaries to get when you purchased your policy. It is (usually) a fixed number.
If you purchased a permanent life insurance policy, your coverage might include a cash value component. This is entirely separate from its face value. When you pay your premiums, your insurance provider puts some of that money into a different account. That money can earn a constant interest rate or be invested, depending on your policy type.
Your cash value can help you in several ways, including:
- Premium payment: If that cash value increases enough, you can usually use it to pay your life insurance premiums.
- Loan guarantee: At a certain point in time (for example, after a certain number of years), you may be able to borrow against its cash value. You’ll usually get a low-interest rate on this loan, but you’ll need to pay it back before you die, or your insurer will deduct the outstanding amount of the loan from its face value.
- Surrender Value – If you decide to give up your life insurance policy, you can recover the cash value as a lump sum. However, it will lose its face value and leave 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 the cash value of your life insurance policy, you’re ready to decide the face value that’s right for you.
You may think you want a policy with a giant face value, but know that the higher the face amount of your policy, the more you’ll pay for it.
So really, choosing the correct face value comes down to balancing the future needs of your loved ones with your budget right now.
Also, insurers will generally limit your face value to a certain amount based on your age and salary. For example, a 20- or 30-year-old might get a policy with a face value equal to about 50 times her current salary, while a 60-year-old might only get a face amount often. Times your current salary. This is because insurers assume that younger people will live longer, which means the insurance company can make more money on your premiums to cover that face amount.
Ultimately, the excellent face value for you will depend on things like:
- how many dependents do you have
- your salary
- Whether or not you want to pay for your children’s college if you have children.
- Your outstanding debts, such as a mortgage
We have a Getting Started Guide and Calculator to help you determine the right level of face amount insurance coverage for your needs.
What causes the face value to change?
Generally, the face value of your policy does not change. You choose that number when you buy your policy and stay at that level until you die, at which point your beneficiaries get that amount of money. That’s one of the key differentiators between life insurance face value and cash value.
But with that said, there are a few things that can alter the amount of your face, so let’s take a look at them.
Using a rider
A rider (also called an endorsement) is additional coverage added to your life insurance policy. And some riders let you take advantage of your face value while you live.
For example, you may choose to add a terminal illness rider. If you’re diagnosed with a terminal illness, you can use part of your death benefit for medical care while you’re alive.
But any money you use while you live will be subtracted from its face value, reducing the benefit your loved ones receive when you die.
Cash Value Growth
Technically, this doesn’t affect your face value, but it does affect the overall value of your policy, so it’s worth mentioning.
As your cash value increases, you may find that your policy becomes more valuable. But remember that there are significant differences between the face value and cash value.
Specifically, it’s essential to know that when you die, your insurance provider absorbs the rest of your cash value unless you have a rider that specifically requires it to be added to your death benefit (i.e., given to your beneficiaries). These riders are rare, so it’s best to assume that cash value growth won’t affect your face amount insurance coverage.
A policy loan
As we mentioned earlier, if you have a policy with a cash value component, you can probably apply for a low-interest loan. But if you don’t pay that money back, your insurance company will subtract the outstanding loan amount from its face value at your death.
Lying on your application or specific causes of death
When your insurer agrees to pay face value to your beneficiaries, they do so under the assumption that you will die due to an unforeseeable cause. If you lie on your application (for example, do not disclose a pre-existing condition) or kill yourself, you violate your agreement with your insurer. At that point, they can void your policy, effectively reducing its face value to zero, leaving your loved ones empty-handed.
