What is face amount in life insurance mean?

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What is The Face Value Of A Life Insurance Policy?
What is The Cash Value Of A Life Insurance Policy?
Life Insurance Face Value vs. Cash Value While Alive
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A permanent life insurance policy including whole life insurance and universal life insurance has a face value and a cash value, which are two distinct values.

The face value is the death benefit. The policy owner’s beneficiaries will receive this amount when he or she dies. This number can be found in the policy’s schedule of benefits.

The cash value is the amount you would receive if you terminated your insurance early, giving up the death benefit in return for money upfront. These are shown on monthly statements sent by insurers to their customers.

The cash value may also be referred to as the cash surrender value.

In most circumstances, the face amount of life insurance is exempt from taxes.

What is The Face Value Of A Life Insurance Policy?

What is the face amount of a life insurance policy? The face value of life insurance is the dollar amount that your life insurance policy is worth. It is also called the death benefit or the face amount of life insurance. When your policy expires, the beneficiary will receive this amount of money.

What is The Cash Value Of A Life Insurance Policy?

The cash value is a savings component of permanent life insurance used as an investment feature. The cash value earns interest over time. If you need this money for an emergency, you may be able to withdraw or borrow against it.

Life Insurance Face Value vs. Cash Value While Alive

Most life insurance companies also offer add-ons called living benefits, which are extra features that can be included in a plan. A living benefit rider is a separate coverage on your basic life insurance policy that supplements certain benefits and safeguards you at an extra cost.

Living Benefits essentially allow the insured to spend the face value while alive. You may spend the living benefits on things like medical costs, among other expenses. With that said, when you die, your beneficiaries will get a lower life insurance payment because you used a portion of the policy previously.

Taxes

Cash Value: When withdrawing from the life insurance policy’s cash value, any interest earned could be subject to ordinary income taxes.
Face Value: When taking a loan from the face value or utilizing a living benefit, the income withdrawn could be tax-free.

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Conclusion

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How Long Do You Have To Have Life Insurance Before You Die?

The face value of a life insurance policy is the amount of death benefit you purchase when you take out the policy, and it’s a primary factor in determining the amount of premium you pay. The face value is stated in the policy documents, and it often, but not always, stays the same as the death benefit throughout the life of the policy.

Knowing when and how the face value might change can help you better manage an existing life insurance policy or better compare your options when shopping for a new one.

The face value, or face amount, of a life insurance policy is established when the policy is issued. It’s the amount of death benefit purchased, which indicates the amount of money the policy will pay to the beneficiary or beneficiaries when the insured person dies. When a life insurance policy is identified by a dollar amount, this amount is the face value. A $500,000 policy therefore has a face value of $500,000.

The face amount that someone applying for insurance can qualify for depends on several factors, including how much coverage they need, how much they can afford, and how much life insurance the company will extend to them (which could be limited by their age, health, or the amount of their existing life insurance coverage).

A life insurance policy with a larger face amount will cost correspondingly more than a policy with a smaller face amount, all other factors being equal.

In some circumstances, the face value amount and death benefit can differ; insurers frequently let you reduce the face value of your policy after it was issued, and in some cases, you can increase it.

Alternate name: Face amount

The face value can be thought of as the starting point for the death benefit—it establishes the death benefit at policy issue and, therefore, the premium. But both the death benefit and face value can sometimes change during the policy’s term.

Here are some examples of when the face value, and death benefit, might change:

Reduction upon request: Insurers will frequently reduce the face value upon request, since this doesn’t increase their liability or exposure to risk. However, increasing the face value often requires that you reapply for the additional amount of coverage.
Decreasing term life insurance: This is a type of term life insurance in which the face value (and death benefit) decrease at regular intervals, such as every year, until the policy’s term expires. However, policy premiums remain level throughout the term. For example, a 30-year decreasing term policy could cover the declining principal amount of a 30-year mortgage.

Guaranteed insurability rider: This rider can be added to a policy at the time of purchase. It allows the insured person to increase the face value, or death benefit, at regular intervals, such as every five years until a certain age, or upon qualifying life events, such as the birth of a child. The key is that they can increase the benefit without providing evidence of insurability—they don’t have to apply or answer medical questions.
Renewable term life insurance: Many term life insurance policies are renewable once the term expires. The insured doesn’t have to provide additional evidence of insurability, but the new premium is based on their current age (and the health they were in when they took out the original policy). Since the cost of insurance increases with age, some people choose to renew for a lower face amount, which comes with a more affordable premium.

Variable life insurance: With variable life policies, you can invest the cash value into subaccounts similar to mutual funds. Depending on investment results, the policy’s face value and death benefit may increase or decrease.
Accelerated death benefit: Accelerated death benefit riders allow the insured person to access the face value of the policy while they’re still living. These riders are generally used to pay for expenses such as the costs of managed home care, long-term care, nursing home care, chronic or critical illness, or disability. But activating these riders reduces the policy’s face amount proportionately.

Though the face amount and death benefit often move in tandem, like in the examples above, there are less common instances when they can differ. This happens primarily with permanent life insurance policies:

Policy loans: If the policyholder takes out a loan against the cash value and does not pay it back, the death benefit will be reduced upon the death of the insured person, even though the face value won’t have changed.
Paid-up life insurance: Participating whole life insurance policies may pay dividends to policyholders in the form of paid-up additional life insurance, which increases the death benefit but does not change the face value of the original policy.
Universal life insurance option 2: With a universal life insurance policy, you can select one of two death benefit options. In the first, the death benefit equals the face value of the policy. The second provides a death benefit equal to the face value plus the accumulated cash value, and so the death benefit can be greater than the face value.

Though the face value is often the same amount as the death benefit, it should never be confused with a policy's cash value. This distinction is only necessary with permanent life policies, which accumulate a cash value—term policies do not.

	Definition	Access during life	Access after death
Face value	The death benefit at policy issue, which can sometimes be increased after policy issue	Cannot be accessed	Cannot be accessed
Death benefit	The amount paid to beneficiaries upon the death of the insured person	Can be accessed via an accelerated benefit rider	Is paid to beneficiaries
Cash value	An internal cash account in permanent life insurance policies	Can be accessed via withdrawals or policy loans	Generally does not add to the death benefit, except on some universal life policies

Permanent policies have a tax-deferred cash value account that offsets the increasing costs of insurance as you age, and it’s almost always smaller than the face amount. In most cases, the death benefit, and not the cash value, is the amount that will be received by your beneficiaries. However, if you select option 2 on a universal life policy (when the policy is issued), the death benefit will equal the face value plus the cash value, so your beneficiaries will receive both.

The face amount of a life insurance policy is frequently the same as its death benefit.
The face amount can be changed in some instances, though it’s generally easier to reduce the face amount than to increase it.
In some cases, the face amount and death benefit are not the same.
The face value is different from the cash value, which is a liquid amount of savings that builds up inside a permanent life insurance policy.