What Is a Life Insurance Face Amount?
- Learn the meaning of life insurance face amount, an important term to know when shopping for life insurance. Find out what can cause changes in face value.
Shopping for life insurance introduces you to new jargon that can quickly become confusing. Knowing what commonly used terms like life insurance face value, death benefit and cash value mean makes it easier to compare policies and allows you to confidently discuss your insurance needs with an agent.
What Does Face Amount Mean for Life Insurance?
The face amount of a life insurance policy tells you how much it pays out to your loved ones or beneficiaries when you die. Normally, the face amount is a round number like $50,000 or $100,000. All life insurance policies have a face value. When you discuss how much life insurance you need, you're considering which face value is right for you.
How Does Life Insurance Face Value Affect the Cost of Premiums?
If you compare two life insurances of the same type with the same features, the one with the higher face value will generally cost more. Other factors also influence the cost of premiums, including:
- Type of insurance
- Your age, health and lifestyle
- Which insurance company you choose
What Is the Difference Between Face Amount and Death Benefit?
The death benefit is the payout that the life insurance company makes to your beneficiaries. When you first take out a life insurance policy, the death benefit and the face amount are the same. Sometimes, death benefit and face amount remain the same throughout the life of the policy. However, they can differ from one another in some circumstances.
What Is the Difference Between Face Value and Cash Value?
The cash value refers to how much a permanent life insurance policy is worth. With whole life and other permanent life insurance policies, a portion of monthly premiums is put into a cash account or investment. The money usually earns interest over time, and gradually, the policy becomes worth money. Cash value is the term that represents how much a permanent life insurance policy is worth. Term life insurance policies don't have any cash value.
Face value is the initial amount of the death benefit that the insurance company promises to pay your beneficiaries.
Will the Face Value of a Life Insurance Policy Ever Change?
The face value of life insurance doesn't ever change because it refers to the initial promised payout. Death benefits may change over time depending on the type of policy and what actions you take. Read on for examples of things that can raise or lower the size of life insurance death benefits.
Increasing Death Benefit Policies
Some permanent life insurance policies have an increasing death benefit. As their cash value grows, their death benefits gradually increase.
Some whole life insurance policies pay dividends. Insurance companies may allow you to apply dividends to your life insurance policy to increase your death benefit.
With permanent life, you can usually take out a loan against the cash value of your insurance policy. The agreement doesn't require you to make any payments, but you can if you wish. When you die, the outstanding balance of the loan is deducted from the death benefit.
Many permanent life insurance policies allow you to make withdrawals from the cash value during your life to cover general expenses or certain costs, such as long-term care. Generally, cash withdrawals reduce the size of the death benefit payout.
Accelerated Death Benefit Riders
Riders are add-ons to insurance policies that you usually pay extra for. An accelerated death benefit rider or ADB allows you to receive a lump sum payment from your insurance policy if you are diagnosed with a terminal illness. The lump sum is subtracted from the final death benefit when you pass away.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance that often allows you to make changes to your coverage over time. With a universal life policy, you can potentially increase or decrease the death benefit.
Accidental Death Benefit Riders
An accidental death benefit rider or ADB increases the size of the death benefit if your death is due to an accident. Accidental causes of death include:
- Workplace incidents
- Car collisions
- Firearms accidents
- Medical errors