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.
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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.
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.
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.
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 interest rate 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.
- how many dependents do you have
- your salary
- whether or not you want to pay for your children’s college, if you have children
- Your outstanding debts, such as a mortgage
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.
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 ten 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:
To help you determine the right level of face amount insurance coverage for your needs, we’ve got a getting started guide and calculator.
what causes the nominal value to change?
Generally, the face amount of your policy does not change. You choose that number when you buy your policy and stay at that level until you die, at which point your beneficiaries get that amount of money. in fact, that’s one of the key differentiators between life insurance face value and cash value.
But with that said, there are a few things that can alter your nominal amount, so let’s take a look at them.
using a rider
A rider (also called an endorsement) is additional coverage you add to your life insurance policy. and some additional clauses allow you to take advantage of its face value while you live.
for example, you may choose to add a terminal illness clause. That way, if you’re diagnosed with a terminal illness, you can use part of your death benefit for medical care while you’re alive.
But any money you use while you live will be subtracted from its face value, reducing the benefit your loved ones will receive when you die.
cash value growth
This doesn’t technically affect your face value, but it does affect the overall value of your policy, so it’s worth mentioning.
As your cash value increases, you may find that your policy becomes more valuable. But remember there are big differences between face value and cash value.
Specifically, it’s important to know that when you die, your insurance provider absorbs the rest of your cash value unless you have a rider specifically requiring it to be added to your death benefit (i.e., given to your loved ones). beneficiaries). These riders are rare, so it’s best to assume that cash value growth won’t affect your face amount insurance coverage.
a policy loan
As we mentioned earlier, if you have a policy with a cash value component, you can probably get a low-interest loan. But if you don’t pay that money back, your insurance company will subtract the outstanding loan amount from its face value at the time of your death.
lying on your application or certain causes of death
When your insurer agrees to pay the face amount to your beneficiaries, it does so under the assumption that you will die as a result of an unforeseeable cause. if you lie on your application (for example, do not disclose a pre-existing condition) or commit suicide, you violate the agreement with your insurer. At that point, they can void your policy, effectively reducing its face value to zero, leaving your loved ones empty-handed.
frequently asked questions
how does face value affect my premiums?
The higher your face value, the higher your premiums. As you choose your life insurance policy face amount, get premium quotes to make sure your budget can accommodate them.
what is the best life insurance company?
that depends. Your age, your family’s needs, your health, and other factors affect your life insurance needs—and the best company to meet them.
But some life insurance companies offer better products and services than others. To help you compare some of the top providers, we’ve compiled a list of the best life insurance companies.
how can i increase the face amount of my life insurance policy?
You can call your insurance provider and ask. In some cases, for example, if your salary has increased significantly since you purchased your coverage, they may be willing to adjust your policy. but this might require an entirely new underwriting process, which means you may need to take a medical exam again. and your premiums will also increase.
If your insurer won’t increase your face value and you want more coverage for your loved ones, you can also purchase an additional life insurance policy separately.