As you search for coverage, for example, you may wonder what the face amount of life insurance is. Also called face value, the face amount of your insurance policy is possibly the most important component of your coverage.
What is the face value of a life insurance policy?
In short, your face value is the amount of money that your beneficiaries will receive from your insurance company at the time of your death. You may hear your death benefit, coverage amount, or face amount called. So when you buy life insurance, this is what you are paying for.
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 your face value as a specified sum. If you are unsure of the face value of your policy, read it carefully. Face value should be easy to find, but if you have a problem, call your insurer. If you are paying for a life insurance policy, you definitely want to know how much money your loved ones will receive when you pass away.
We mentioned that using the cash value of your policy can affect its face value. The conversation between life insurance face value and cash value can get a bit confusing, especially since these two policy components have a similar name. But you should know that these are two different things.
Let’s look at the face value versus the cash value. Face value / face amount is, as we said, your death benefit. It is the amount of money you chose for your beneficiaries to get when you bought your policy. It is (generally) a fixed number.
If you purchased a permanent life insurance policy, your coverage may also include a cash value component. This is completely separate from its face value. When you pay your premiums, your insurance provider puts some of that money in a separate account for you. That money can either earn a constant interest rate or be reversed, depending on the type of policy you choose.
Your cash value can help you in a number of ways, including:
- Premium payment: If that cash value goes up enough, you can usually use it to pay your life insurance premiums.
- Loan guarantee: At a certain time (for example, after a certain number of years), you may be able to borrow against its cash value. You’ll typically 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 loan amount from its face value.
- Salvage Value – If you decide to waive your life insurance policy, you can get the cash value back as a lump sum. However, you will lose your 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 are ready to make an informed decision about the face value that is right for you.
You may think that you want to get a policy with a huge face value, but you should know that the higher the face amount of your policy, the more you will pay for it.
So really, choosing the right 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 factors like your age and salary. A 20- or 30-year-old could get a policy with a face value that is roughly 50 times their salary right now, for example, while a 60-year-old could only get a face amount of ten. times your current salary.
Ultimately, the proper 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, like a mortgage
To help you determine the correct level of face amount open care final expense plans for your needs, we have a getting started guide and calculator.
What makes the face value 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 your death, at which point your beneficiaries get that amount of money. In fact, that’s one of the key differentiators between life insurance’s 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 that you add to your life insurance policy. And some passengers allow you to take advantage of your face value while you live.
For example, you can choose to add a terminal illness rider. That way, if you are diagnosed with a terminal illness, you can use part of your death benefit to receive medical care while you are alive.
But all the money you use while you live will be subtracted from its face value, reducing the benefit your loved ones receive when you pass away.
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 feel that your policy becomes more valuable. But remember, there are big differences between face value and cash value.
Specifically, it is important to know that when you die, your insurance provider absorbs the remainder of your cash value unless you have a rider that specifically requires it to be added to your death benefit (that is, 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 the time of your death.
Lying on your request or on certain causes of death
When your insurer agrees to pay the total value to your beneficiaries, they do so under the assumption that you will die as a result of an unforeseeable cause. If you lie on your application (for example, you don’t reveal a pre-existing condition) or commit suicide, you violate the agreement with your insurer. At that point, they can void your policy, effectively reducing its total value to zero, leaving loved ones empty-handed.
How does face value affect my premiums?
The higher your total value, the higher your premiums. As you choose the face amount of your life insurance policy, get quotes for the premiums to make sure your budget accommodates them.
What is the best insurance company?
It depends. Your age, your family’s needs, your health, and other factors affect 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 top providers, we’ve compiled a list of the best life insurance companies.
How do I increase the face value of my life insurance policy?
You can call your insurance provider and ask. In some cases, for example, if your salary has increased significantly since you bought your coverage, they may be willing to adjust your policy. But this could require a completely new underwriting process, which means you may need to go back for a medical exam. And your premiums will also go up.
If your insurer doesn’t increase your total value and you want more coverage for your loved ones, you can also purchase an additional life insurance policy separately.
Advantages of cash value
Experts recommend that when purchasing permanent life insurance you opt for the cash value option.
Underwriting a policy of this type has several advantages. Let’s review some of them:
- Depending on the specific terms of your contract, cash value life insurance can be used almost like a savings account .
- Cash values are tax-deferred , therefore you will not have to pay taxes unless the funds are withdrawn.
- If the funds are withdrawn to use them, for example, for a policy loan, you will not have to pay the Treasury any amount at the tax level.
- At the time of your death, policy beneficiaries can get a higher sum if your policy has additional options associated with it or if there are no funds in the cash value account.
Do not forget that before any change in your life you can review your Life insurance at all times.
The cash value in whole life insurance and universal life
Cash value does not act the same for all types of life insurance. While in whole life policies and in option B of universal life insurance this is paid together with the total value after the death of the insured, with option A of universal life insurance the cash value is not paid .