Life Insurance Face Amount

When you purchase life insurance, you are ensuring that if you die, your insurer will pay out a sum of money to your loved ones. That figure is known as your policy’s face amount, or face value, and it influences how much you pay in premiums.

While it normally remains the same, there are a few circumstances that can cause a change in face value.

What is the face value of life insurance?

The face value is the amount of money that your insurer has agreed to pay out if you die. When you purchase a life insurance policy, you specify the face amount, which is indicated in your contract.

The face value is typically the amount your life insurance beneficiaries would get if you die while your policy is active. So, if you acquire a policy with a face value of $500,000, your life insurance company will most likely pay $500,000 to your beneficiaries when you die.

Choosing the right life insurance face amount

The idea is to select a policy that you can afford while allowing your beneficiaries to maintain their current lifestyle.

Here are some factors to consider:

Your coverage needs. Consider your present expenses such as rent, mortgage or credit card payments, groceries, bills, child care, and education when determining how much life insurance you require. Next, examine any future expenses, such as college tuition or care for aging parents. Ideally, you should take out a policy that matches the dollar amount you finish up with. 

Another way to calculate the numbers is to divide your pay by 4% or 5%. With a life insurance death benefit of this size, your heirs may replace your income by earning a 4% to 5% return on the lump sum they get. If you make $50,000 per year, you may choose an insurance with a face value ranging from $1 million to $1.25 million.

Your budget. Generally, the bigger the face value of your coverage, the higher your insurance premiums will be. Once you’ve determined how much coverage you need, compare life insurance quotes to find the best deal.

The amount of life insurance you are qualified for. Some types of life insurance have a minimal coverage limit. Final expense life insurance plans, for example, typically vary from $2,000 to $25,000 because they are only intended to cover funeral, burial, and end-of-life expenses.

In other cases, you’ll need to qualify for a specific level of coverage.

• You are applying for a hefty life insurance coverage. Want to get a million-dollar life insurance coverage, or even more? Expect your insurer to ask for proof of your income or net worth to demonstrate the necessity for a large policy and your ability to pay premiums. While all life insurance policies require a medical exam, larger policies may demand additional health testing, such as a treadmill electrocardiogram.
• You are in poor health. If you purchase life insurance with a pre-existing medical condition, your coverage options may be limited.

When your face value might change

Typically, your life insurance face amount does not alter. You choose that monetary amount when you purchase the policy, and it remains constant until the policy expires or you die.

However, a few factors can cause the face amount, or at least the life insurance payout, to increase or decrease.

You activated an accelerated death benefit rider

An accelerated death benefit rider permits you to receive a portion of your policy’s payout — typically 25% to 95% — while still alive. It often applies if you are diagnosed with a serious illness that reduces your life expectancy or necessitates special or 24/7 care.

The money is then deducted from your death benefit, which may reduce the face value of your insurance. Assume you own a $250,000 policy and decide to withdraw 50% of the death benefit to cover medical expenditures. You will receive $125,000 in cash, and your beneficiaries will receive the remaining $125,000 after you die.

You opted in to a guaranteed insurability rider

This rider allows you to increase coverage to your insurance at a later date without having to take another medical exam or answer health questions, thus raising its face value.

The guaranteed insurability rider, also known as a “guaranteed purchase option rider,” typically allows you to acquire more coverage at regular periods or after a major life event, such as having a child.

You took out a loan against your policy’s cash value

One of the advantages of permanent life insurance is the potential to accumulate monetary value over time. Once you’ve accumulated enough cash value, you can start borrowing against your policy.

While you are not required to return the loan, the outstanding balance will be deducted from your death benefit after you die to repay your insurer.

You withdrew some of your policy’s cash value

Most permanent life insurance policies allow you to cash out by withdrawing a portion of the cash value. This often reduces the face amount.

You requested to increase your coverage

Need more life insurance? Some insurers will allow you to increase your existing coverage, but you will typically have to go through the life insurance application procedure again because the insurer is taking on extra risk.

You reduced your policy’s face value

On the other hand, most insurers are willing to negotiate a lower face value for your policy.

If you have term life insurance, you are likely to pay a lesser premium. If you reduce the face value of a whole life insurance policy sufficiently, your insurer may consider you “paid up.” This means you won’t have to pay any premiums, but your coverage will remain active.

You have a decreasing term life insurance policy

With decreasing term life insurance, your policy’s face value decreases over time until the term expires.

This sort of insurance is usually associated with a debt that lowers over time, such as a mortgage. That way, if you die during the term, your loved ones can use the payoff from your policy to pay off the debt.

You have a universal life insurance policy

Universal life insurance, often known as “adjustable life insurance,” provides death benefits that are flexible. You can adjust the payment to meet your specific demands, which affects the face value of your policy.

This bonus is also available with variable universal life insurance. Just be aware that you may need to take another medical exam to qualify for additional coverage.

Your policy has an increasing death benefit option

Some permanent life insurance policies feature a rising death benefit option, which implies that the cash value adds to the death benefit. Beneficiaries receive the policy’s face amount plus its cash surrender value. Policies with a growing death benefit usually have higher premiums than policies that pay out merely the face amount.

Your insurer finds out you lied on your application

Lying or omitting information on your life insurance application is one example of fraud. Furthermore, it may jeopardize the settlement you leave for your loved ones.

If the insurer discovers that you lied on your application or neglected to declare a pre-existing condition, the firm may reduce your death benefit or refuse to pay your beneficiaries at all.

What’s the difference between face value and cash value?

Every life insurance policy has a face value; however, only some have a cash value. This is the savings component of a permanent insurance, which you can usually access after two to five years.

While life insurance cash value accumulates interest over time, it normally has no effect on the face value of your policy.

Key features of face value vs. cash value