The face value of a life insurance policy is the amount the insurer agrees to pay to the beneficiaries upon the policyholder’s death.
This value is set when the policy is purchased and represents the sum assured, which doesn’t include any bonuses, riders, or additional benefits.
The face value is important because it determines the basic coverage provided by the policy, ensuring financial protection for your loved ones.
In some cases, the policyholder may increase the face value over time by adding riders or opting for a higher sum assured.
It’s also essential to remember that the face value doesn’t change with market conditions, as it is fixed at the start of the policy.
Understanding the face value helps policyholders make informed decisions about their coverage needs.
Understanding The Face Value Of A Life Insurance Policy
As mentioned above, the face value of a life insurance policy is the amount the insurer agrees to pay your beneficiaries when you pass away.
This value is set when you first buy the policy and is clearly mentioned on the policy document. For most term life policies, the face value will remain the same until the policy comes to an end.
However, for permanent life insurance, the face value can change over time. It might increase if you add extra coverage or let dividends grow within the policy.
On the other hand, withdrawing money from the policy or taking a loan against it can reduce the face value. This means your beneficiaries would receive a smaller payout if you pass away.
Any changes to the face value, such as increases or decreases, are usually listed in the policy’s benefit schedule.
How To Calculate Face Value
To figure out the total amount your beneficiaries will receive when you pass away. You can start by looking at your policy’s latest statement.
Also, check if your policy includes any riders, which are extra benefits that might increase your payout. For example, some riders may double the face value if you die in a specific type of accident.
As your policy ages and changes, it can get harder to calculate the exact face value on your own. If that happens, reach out to your insurance agent for help.
They can give you the precise face value and explain any options you have. This includes; withdrawing money from your permanent life policy and how it might affect your payout.
Cash Value vs. Face Value
The face value and cash value of a life insurance policy are two separate things, even though they sound similar. Here’s the difference:
Face Value
This is the amount your beneficiaries will get when you die. It’s the death benefit that your policy provides, and in term life insurance, this amount doesn’t change throughout the policy’s term.
For permanent life insurance, the face value is also the amount paid to your family upon your death, but it can be affected if you borrow from the policy’s cash value.
Cash Value
This is a feature found in permanent life insurance policies like whole life or universal life. A portion of your premium goes into an account that grows over time, earning interest.
This cash value doesn’t affect the face value directly. But it can be used in different ways, such as paying your premiums, borrowing against it, or even cashing it out if you cancel the policy.
However, any loans or withdrawals from the cash value can reduce the death benefit your beneficiaries will receive.
In summary, the face value is the death benefit. While the cash value is the money that builds up over time and can be used during your lifetime.
If you borrow from or withdraw the cash value, it may lower the face value.
When Your Life Insurance Face Value May Change
In most life insurance policies, the face value remains the same throughout the life of the policy, but there are situations that can cause it to change. Here are a few ways your face value might increase or decrease:
Accelerated Death Benefit Rider
If you have this rider, you can access part of your death benefit while you’re still alive, usually due to a serious illness. The amount you take out will be subtracted from the face value, reducing the amount your beneficiaries receive.
Guaranteed Insurability Rider
This rider lets you increase your coverage without a medical exam, which increases your face value.
Loan or Withdrawal against Cash Value
If you borrow or withdraw from your policy’s cash value, it will reduce the face value. Any outstanding loan will be deducted from the death benefit when you pass away.
Increasing Coverage
If you decide to buy more coverage, your face value can increase, but you’ll need to go through the application process again.
Decreasing Term Insurance
In some policies, like decreasing term life insurance, the face value decreases over time, usually in line with a debt, like a mortgage.
Universal Life Insurance
This type of policy allows you to adjust your death benefit, so your face value can be increased or decreased based on your needs.
Increasing Death Benefit Option
Some policies let the death benefit grow over time, adding the cash value to the face amount. This results in a higher payout but usually comes with higher premiums.
Fraud
If the insurer finds out you lied on your application, they can reduce the face value or even deny the death benefit altogether.
So, while your face value usually stays the same, certain actions or changes to your policy can cause it to go up or down.
Frequently Asked Questions
How Is The Face Value Determined?
The face value is determined based on various factors, including the insured’s age, health, lifestyle, and the type of coverage chosen. Policyholders can usually choose the face value when purchasing a policy.
How Does The Face Value Affect My Premiums?
Generally, higher face values result in higher premiums, as the insurer’s risk increases. Lower face values will have lower premiums.
Are There Circumstances Where The Face Value May Not Be Paid?
Yes, if the policy is not in force due to non-payment of premiums, or if there is policy-specific exclusion (e.g., suicide clauses during a certain period), the face value may not be paid.
