FAQ

What does face value mean on a life insurance policy

When you’re shopping for life insurance, you may feel like you need a glossary just to get the process started. even the best life insurance companies use industry jargon that can make buying a policy feel overwhelmingly confusing.

While shopping for coverage, for example, you may be wondering 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. therefore, it is very important that you understand what face value means and be able to differentiate between face value and cash value.

Reading: What does face value mean on a life insurance policy

what is the face value of a life insurance policy?

In short, your face value is the amount of money your beneficiaries will receive from your insurance company at the time of your death. you may hear it called your death benefit, coverage amount, or face amount. so when you buy life insurance, this is what you’re paying for.

so what is the face amount 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 state their face value as a specified sum. If you’re not sure of the face amount of your policy, read it. the face value should be easy to find, but if you have a problem, call your insurer. If you’re paying for a life insurance policy, you’ll definitely want to know how much money your loved ones will receive when you pass away.

cash value

We mentioned that using the cash value of your policy can affect its face value. The conversation between face value and cash value life insurance can seem a bit confusing, especially since these two policy components have very similar names. but you should know that these are two separate things.

let’s look at face value vs. cash value. the 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 purchased your policy. is (usually) a fixed number.

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If you purchased a permanent life insurance policy, your coverage may also include a cash value component. this is completely independent of its face value. When you pay your premiums, your insurance provider puts some of that money into a separate account for you. That money can earn a constant rate of interest or be invested, 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 increases enough, you can usually use it to pay your life insurance premiums.
  • Loan Collateral: At a certain point in time (for example, after a certain number of years), you may be able to borrow against its cash value. You’ll usually 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 amount of the loan from its face value.
  • surrender value: If you choose to surrender your life insurance policy, you can recover the cash value as a lump sum. however, it will lose its 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’re ready to make an informed decision about the face value that’s right for you.

    See also: Topic No. 502 Medical and Dental Expenses | Internal Revenue Service

    You may think you want a policy with a huge face value, but know that the higher the face amount of your policy, the more you’ll pay for it.

    So really, choosing the right face value comes down to balancing the future needs of your loved ones with your current budget.

    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 might get a policy with a face value of about 50 times their current salary, for example, while a 60-year-old might get only a face amount of 10 times their current salary. That’s because insurers assume younger people will live longer, which means the insurance company can make more money on your premiums to cover that face amount.

    Ultimately, the correct face value for you will depend on things like:

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