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When you purchase a life insurance policy, you’re probably paying close attention to the type of coverage and what your monthly premiums will be. And that’s important stuff! But to ensure that you get the right policy for your needs, you should also think about the policy’s face value — meaning the amount of money that your provider will pay out to the policy’s beneficiaries.
Face value (also known as the face amount) applies to all types of life insurance policies. As an example: if you buy a life insurance policy worth $200,000, the face value of the policy is $200,000 — which means the insurer will pay $200,000 to the family or beneficiaries as the death benefit when the policyholder passes away.
Although they sound similar, face value and cash value are not the same thing. For one thing, a cash value grows over time, whereas the face value remains the same throughout. Said another way: the face value is the coverage amount on the life insurance policy you purchase, whereas the cash value is the cash amount that builds up on your permanent life insurance policy over time.
And another difference: face value applies to all types of life insurance, whereas you’ll only find a cash value in whole, universal, and variable life policies. Other policies, such as term life insurance, do not offer cash value. And while a cash value can be withdrawn in part or full from a permanent policy before the policyholder dies, the face value is only accessible following the death of the policyholder.
And one final note: Keep in mind that face value payouts are taxable — but the cash value is tax-deferred while it’s growing.
Before you buy a life insurance policy, you’ll want to figure out how much coverage you need. To simplify the decision, you can calculate your recommended face value by multiplying your annual income by 10 and adding any outstanding debts to the total.
So for example: if your annual salary is $80,000, multiplying the salary by 10 will make it $800,000. But if you have $100,000 in student loan debt, add this amount to $800,000 to get a $900,000 policy. This $900,000 is the recommended face value of your life insurance policy.
If you want even more precision, you can look to the DIME formula by adding up the following:
And once you purchase your policy, you can always find the finalized face value amount on your statement of benefits page.
In most cases, the answer is no: the face value of the life insurance policy remains unchanged. It is, however, possible to increase the life insurance face value in some cases — but you’ll need to contact your provider. If you do so, it's possible that the insurer will ask you to reapply for a life insurance policy and undergo another health exam (which could cause your premiums to go up).
Buying an additional life insurance policy is certainly the most feasible way to increase your face value. However, this will likely increase premium payments in total.
Cash value will not impact the face value directly, but it can increase the overall death amount that the beneficiary will receive from the policy. For example, when the policyholder dies, their beneficiaries will receive the face value and the cash value that has accrued during the time that the life insurance policy was in effect.
Two other considerations about the face value:
Hoping to buy a life insurance policy but nervous about determining the correct face value for your needs? Look no further than Marble, the online insurance comparison tool where you can shop for options and compare quotes — all while earning rewards! Sign up for Marble today!
