What Is the Face Value of Life Insurance?
The face value of life insurance is simply how much the policy is worth, or the amount of money your beneficiaries will receive if you pass away while the policy is active. Other common terms used to describe the face value are the death benefit, the face amount, or the coverage amount.
A life insurance policy’s face value refers to its standard death benefit. For example, if a person buys a 20-year, $500,000 term life insurance policy, the death benefit is $500,000. The insured amount does not include additional amounts that may be payable under the policy, such as an accidental death benefit.
Table of Contents
The Importance of Your Policy’s Face Value
The face value or death benefit is generally the main reason why consumers purchase life insurance policies, as that is the amount of money beneficiaries receive if the policyholder passes away while coverage is in place.
This coverage is crucial for many families: 25% of American households say they’d face financial hardship within just one month of the primary wage earner’s passing. A life insurance death benefit can help households cover day-to-day necessities, such as rent or mortgage payments, grocery bills, and car payments. It can also help pay for long-term financial needs, such as a child or grandchild’s college tuition or spouse’s retirement savings.
How Face Value and Your Policy’s Death Benefit Work
The face value of life insurance is the same thing as the policy’s standard death benefit. However, life insurance companies may use the term in a slightly different way.
For life insurers, “face value” is a term used to manage the company’s future obligations to policyholders. Insurers are required to set aside enough policy reserves — or readily available assets — to pay life insurance claims if and when they occur. This ensures beneficiaries receive the payments they’re entitled to in a timely fashion.
But policyholders may equate the face value and death benefit as one and the same.
Face Value By Life Insurance Policy Type
The face value of life insurance is the initial standard death benefit, but the amount of money a person’s beneficiaries actually receives can be higher or lower depending on the policy type.
Standard Life Insurance, or Level Face Value
Standard life insurance policies have level face values, which means the death benefit remains the same for the life of the policy.
For example, consider a 10-year, $250,000 term life insurance policy. Whether the insured person passes away during the third year of the term or the ninth year, their beneficiaries would receive the same amount: $250,000. The same is true for permanent life policies.
If an individual purchased a whole life insurance policy at 45 years old with $250,000 of coverage and died four decades later, their beneficiaries would still receive $250,000 as long as the policyholder kept up with premium payments.
Decreasing Term Life Insurance, or Decreasing Face Value
True to its name, decreasing term life insurance is a type of policy with a death benefit that decreases over time. It’s often used to cover the remainder of a long-term debt, such as a mortgage, business loan, or personal loan.
For example, consider a 30-year, $600,000 decreasing term life policy that decreases by $100,000 every 5 years. In the first year, the death benefit is still $600,000, but by year 20, it will have dropped to $200,000. Premiums typically lower as the insured amount lowers.
Universal Life Insurance, or Variable Face Value
Universal life insurance is a type of permanent life insurance that allows policyholders to raise or lower their existing policy’s insured amount to adapt to their changing needs. However, there are often restrictions on how often and by how much a policyholder may make these changes.
For example, consider a policy with an initial death benefit of $400,000. The policyholder could choose to lower their policy’s death benefit to $200,000, or even request an increase to $600,000. Keep in mind that insured amount decreases and increases have corresponding changes in premium. Lowering your policy’s death benefit may lower your monthly premium, while increasing the death benefit would increase the premium.
How Renewing or Converting a Term Policy Affects Face Value
Some term life insurance policies are renewable at the end of the policy term. Term life premiums generally increase upon renewal, so consumers who want to keep their premium payments the same may need to request a lower insured amount.
Convertible term life policies can be changed into a whole life policy with the same face value. The appeal of this type of term life insurance is that you will not need to undergo medical underwriting again, so your health status will not affect your converted policy’s premium. However, your age will be factored in, so your premium will likely increase.
Face Value vs. Cash Value
Face value and cash value sound similar, but they describe very different things. The face value is the standard death benefit for a life insurance policy, while cash value is the savings element of a permanent life insurance policy. Term life policies do not have a cash value component.
Permanent life insurance policies include a cash value account for the policyholder to use during their lifetime. This is funded by premium payments, and the cash value grows over time based on the policyholder’s continued premium payments and dividends paid by the insurance company, as well as accrued interest.
Your Policy’s Cash Value Can Affect Face Value
While cash value is a component of a permanent life insurance policy, it can in fact affect your policy’s face value if you:
- Withdraw money from your cash value
- Take out a loan against your cash value
Both of these actions may reduce the policy’s face value, which means the death benefit available to your beneficiaries also reduces.
Policyholders can withdraw a portion of their accrued cash value. Withdrawals do not need to be repaid, making them a convenient source of funds for college tuition, healthcare expenses, and other needs. However, withdrawing money from the cash value reduces the policy’s death benefit. This reduction could be equal to or greater than the withdrawal amount, depending on the insurer’s policies.
Policyholders can borrow against their policy’s cash value. Since the policy itself is used as collateral, there is no credit check required, which can make this type of loan more accessible for those with poor credit.
However, if the policyholder passes away before repaying the loan in full, the outstanding balance is deducted from their policy’s face value. For instance, if you have a $500,000 policy but $100,000 in outstanding loans, the death benefits are reduced to $400,000.
How Does This Affect Your Policy’s Surrender Value?
The surrender value is the amount of money a policyholder receives if they decide to cancel a permanent life insurance policy. Generally, it’s the policy’s cash value balance minus surrender charges and applicable taxes. These charges vary based on the policy type and insurance company.
Since withdrawals and policy loans reduce the policy’s cash value, they also reduce the potential surrender value available to policyholders. If you choose to take the surrender value, your life insurance policy is canceled and your beneficiaries will not receive a death benefit.
How Much Should Your Life Insurance Face Value Be?
The right life insurance policy value for anyone depends on individual needs. When calculating the amount of coverage to purchase, consider:
- Your income: Multiply your annual income by a set number of years. As a general rule, life insurance shoppers are advised to purchase 10 to 15 times their annual salary.
- Your current expenses: Consider the expenses your household relies on you to handle, such as rent or mortgage payments, grocery bills, and car payments.
- Your outstanding debts: Add up your remaining loan balances to take into account how much may need to be settled if you pass away, such as mortgage and business loans.
- Your future goals: Consider the costs associated with your family’s long-term financial goals, such as your child’s college tuition or your spouse’s retirement.
- Your budget: The life insurance insured amount also determines the premiums you pay during your lifetime. Policies with higher death benefits have higher premiums, while policies with a lower life insurance value have lower premiums. Consider what premium payments you can reasonably afford.
How to Increase Your Policy’s Face Value
In some cases, you may realize after the fact that your life insurance policy face value is too low for your needs. Fortunately, there are several ways to increase your policy’s death benefit, including adding a rider, working with the insurer, or applying for a secondary policy.
1. Add death benefit riders
Riders are optional policy add-ons that provide extra coverages. People who want a higher death benefit may consider purchasing an accidental death benefit rider, for instance. This rider provides an additional payment for deaths resulting from covered accidents.
Accidental death benefit payments vary, but generally, they’re equal to the face value of the original policy. For example, if a person has a policy with a $500,000 face value, this rider provides an additional $500,000 in the event of an accidental death — for a total of $1 million.
2. Work with your insurer to increase your policy’s death benefit
It may be possible to raise the death benefit of an existing policy, though this depends on the type of policy and the insurer’s rules. When it’s available, life insurance companies may require a new underwriting process before approving the increased insured amount. Be prepared to answer medical questions and take a medical exam. If the application is approved, your premiums will likely go up to reflect the higher level of coverage.
3. Apply for a new life insurance policy with a higher face value
Consumers are allowed to own more than one life insurance policy, so if your current policy’s insured amount is too low for your needs, consider supplementing the coverage with a second policy. This supplemental policy does not have to be with the same insurer.
For instance, a person who already has a $250,000 policy but wants $750,000 in coverage could apply for a second policy with a $500,000 face value. Together, the two policies provide the desired life insurance value.
4. Is There Ever a Reason to Decrease Face Value?
In certain situations, it may make sense to decrease a policy’s face value. For example, you may decide to lower your coverage amount once you’ve paid off your mortgage, or when your children become financially independent and no longer rely on your income.
Since face value is a major factor used to set life insurance premiums, opting to decrease the policy’s insured amount translates to lower premiums. However, carefully consider this decision because it may not be reversible.
What This Means For You
The face value of life insurance is one of the more important insurance terms to remember. After all, it’s the amount of money your beneficiaries stand to receive when you pass away. To choose the right insured amount for your family’s needs, carefully consider what you would like your death benefit to do for your beneficiaries, such as cover your debts or provide income replacement. Also take your own budget into account.
Life insurance can be complicated, but consumers do not have to navigate this unfamiliar world on their own. For help making life insurance policy value decisions, work with a trusted agent.