What does the term face value mean in regard to a life insurance policy?
When you buy a life insurance policy, the term “face value” or “face amount” indicates how much the policy you purchase is worth. For example: A life insurance policy of $25,000 has a face value of $25,000. It is typically the amount of money the insured’s beneficiary will receive if the insured dies while the policy is in force. However, there are times where the face value of policy and its death benefit may differ from each other.
This article focuses on whole life insurance. Term life insurance doesn’t build cash value, and generally loans are not associated with term life.
A death benefit is the amount paid out to the beneficiary upon the insured’s death if the policy is in force at the time of death. The amount of death benefit paid is based on the face value of the policy minus any loans taken against the insurance policy, surrender charges, and any other fees the company may charge. The death benefit includes any cash value that has built up over the course of the whole life policy.
If money has been withdrawn from the face value of the insurance policy, and it is not repaid with interest, the death benefit will be reduced. Therefore, the face value and death benefit will be different.
For example: The death benefit of a life insurance policy with a face value of $25,000 is reduced when the insurer withdraws $10,000 in the form of a loan and does not pay the amount back prior to his or her death. The death benefit would be reduced from $25,000 to $15,000. The beneficiary would only be paid a death benefit of $15,000.
In this same example, the insured has paid all the premiums in full and no cash withdrawals, the death benefit upon maturity or death will be $25,000. The maturity date is the date when the insurance policy is fully funded and benefits are paid.
What changes the life insurance policy value?
Some factors or actions can change the face value of a life insurance policy, thereby affecting the death benefit.
- The death benefit can change over time as additional insurance is purchased, or as the cash value with the policy rises or falls.
- If the insured takes out a loan against the cash value of the insurance policy and does not pay it back before the maturity date or the death of the insured.
Here are some simple examples of how different conditions can affect the death benefit:*
| Face Value of | Withdrawal with | Death Benefit |
|---|---|---|
| $25,000 | No Withdrawal | $25,000 |
| $25,000 | $10,000 | $15,000 |
| $25,000 Accelerated Death Benefit Rider | $10,000 withdrawal for terminal illness | $15,000 |
* The amount of death benefit paid is based on the face value of the policy minus any loans taken against the insurance policy, surrender charges, and any other fees the company may charge.
Acceleration of death benefits, a rider that gives more face value
Many whole life insurance companies offer an accelerated death benefit that allows the policy holder access to some, or all of the death benefit proceeds because of a terminal illness. A medical physician has documented the insured has a terminal illness with a low rate of survival beyond twelve months.
The insured may take a disbursem*nt of a portion of the death benefits while the insured is still alive and leave the remainder of the death benefit to be paid when the insured dies.
Example: A $25,000 life insurance policy has an accelerated death benefit rider. The insured has been diagnosed with terminal cancer by a licensed physician. The insured takes a large portion of the face value - $10,000 - and the remaining $15,000 is earmarked for funeral arrangements.
You can plan and choose the right coverage needed for you and your family. Ask questions to a professional and licensed life insurance agent who can help you understand the finer points of life insurance, accelerated death benefits, and cash and face value.
Reading Sources:
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Nerdwallet, Lervasi, https://www.nerdwallet.com/article/insurance/cash-value-life-insurance, accessed April, 2023.
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Texas Department of Insurance, https://www.tdi.texas.gov/pubs/consumer/cb018.html, accessed August, 2023.
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National Association Insurance Commissioners, https://content.naic.org/consumer_glossary#F, accessed 2023.
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Senior Care, https://www.payingforseniorcare.com/financial-products/insurance, accessed 2023, written 2020.
Categories: Insurance, Life Insurance, Term Life Insurance, Whole Life Insurance
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