Your Beneficiaries Receive One And You Can Tap Into The Other
All life insurance policies have a face amount, which is also called the death benefit, this is the amount thats paid to your beneficiaries after you die. But only permanent life insurance policies have cash value, which functions similar to a savings or investment account that you can use while youre still alive.
Features Of Face Amount Vs Cash Value
|What it covers||A death benefit amount paid to beneficiaries once the policyholder dies.||An investment component that grows over time and can be used for anything, such as a retirement supplement|
|Who its for|
|Payout options||Single lump sum payment||You can withdraw any amount of the cash value at any time. If the entire cash value is taken out, the policy will cancel|
Definition And Example Of The Face Value Of A Life Insurance Policy
The face value, or face amount, of a life insurance policy is established when the policy is issued. Its the amount of death benefit purchased, which indicates the amount of money the policy will pay to the beneficiary or beneficiaries when the insured person dies. When a life insurance policy is identified by a dollar amount, this amount is the face value. A $500,000 policy therefore has a face value of $500,000.
The face amount that someone applying for insurance can qualify for depends on several factors, including how much coverage they need, how much they can afford, and how much life insurance the company will extend to them .
A life insurance policy with a larger face amount will cost correspondingly more than a policy with a smaller face amount, all other factors being equal.
In some circumstances, the face value amount and death benefit can differ insurers frequently let you reduce the face value of your policy after it was issued, and in some cases, you can increase it.
- Alternate name: Face amount
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At What Age Should I Get Life Insurance
Since the cost of life insurance rises as you get older, the most cost-effective strategy is to buy it as soon as you know that you need it. For most people, that moment arrives when they get married or have a child, but coverage can become necessary in any situation where you know someone else will be relying on you financially.
How To Calculate The Face Value Of A Life Insurance Policy
Calculating the face value of your life insurance policy isnt hard. Youll need to look at the schedule of benefits, which is typically given to you when you purchase the policy. This document summarizes what your beneficiaries will receive when you die.
Your first step is to total the benefits that are listed on the document. Then take a look at any riders that you purchased with your policy. You may have additional benefits in the riders to add to your total. Also check your monthly statement or online documentation to see if any of your policys cash value has accumulated enough to be added to your death benefit.
Finally, if you have taken out a loan on your policy and havent paid it back or dont intend to pay it back subtract the amount of the loan from the previous total. The final number will be your current face value.
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Is The Cash Value Always Different Than The Face Amount
For the majority of a life insurance policy’s existence, the cash value will be some value different from the face amount. Even more precisely, the cash value is always a number less than the face amount.
That being said, the cash value is on an eventual path to equal the face amount of the life insurance policy.
When The Insured Dies What Happens To The Cash Value In The Policy
For most cash value life insurance policies, the insurance company keeps the cash value accumulated in a policy and pays the beneficiary the death benefit of the policy.
One exception to this statement is universal life insurance policies that use an increasing death benefit increased by the cash value in the policy. The common name for this is Death Benefit Option B . In the case of such a universal life policy, the insurance company pays both the initial death benefit and the cash value accumulated in the policy.
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What Is The Face Value Of Life Insurance
The face value of life insurance is how much your policy is worth, and more importantly, how much life insurance money is paid out when the policyholder dies. Within your policy, it is officially denoted as the death benefit. Face value can also be used synonymously with face amount or coverage amount.
The exact face value of your life insurance policy will depend on how much coverage you bought. If you bought $1 million in life insurance coverage, your policys face value is $1 million, which is also how much your beneficiaries will receive if you die while your policy is active.
Face Value Of A Policy Vs Its Cash Value
The face value of your policy is the amount you are paying when you submit your premiums. The cash value is the amount of equity you build within your policy with each premium you pay. With some life insurance policies, you may be able to borrow against the equity or cash value portion of your policy. While not all policies will allow you to do this, those that do give you several options on how to pay the money back. With some policies, you may not be required to pay any of it back. With others, you make payments along with your monthly premium.
Understanding your life insurance policys face value and cash value is important. You will know exactly how much you have available if something happens to you and your family needs to survive. at Randy Jones Insurance Services if you have any questions. We can help you figure out what values you have with your current policy and can help you increase or decrease them as needed.
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What Is Whole Life Insurance
Whole Life Insurance, sometimes called permanent insurance, or ordinary life, is designed to stay in force throughout ones lifetime. As long as the policy owner meets his or her obligations under the policy, the policy remains in force, regardless of any changes in health that may occur.
Premiums for most whole life policies remain level. A portion of each premium payment is set aside to earn interest. Over time, a whole life policy will develop cash values. The accumulated cash values form a reserve which enable the insurer to pay a policys full death benefit, while keeping premiums level.
During life, many whole life policies have provisions to borrow a portion of the accumulated cash value. If a policy is terminated without the insured dying, there are various surrender options for the cash value available to a policy owner.
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.
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Common Words And Phrases In Life Insurance
Beneficiary: The beneficiary of a life insurance policy is the person, organization or trust that you define as receiving the life insurance payout. If you take out a $10,000 policy and name your child the sole beneficiary, when you die, they get $10,000.
You can also assign multiple beneficiaries to your policy and define just how much of the policy theyll receive. For example: John takes out a $25,000 life insurance policy. He names his wife and his two sons as the beneficiaries of his policy, but he specifies that his wife will receive 50% of the payout and each of his sons will receive 25% of the payout. John dies, and his wife gets $12,500, while each son gets $6,250.
Death Benefit: A death benefit is the money paid upon the death of the insured. Its usually a payout of the full coverage amount defined in the policy .
Face Value: The face value of the policy is simply the coverage amount the policy is worth. So, the face value of a $10,000 policy is $10,000. This is usually the same amount as the death benefit.
Cash Value: For most whole life insurance policies, when you pay your premiums some of that money goes into an investment account. The money in this account is the cash value of that life insurance policy. If you cancel a policy, you can receive the cash value of the policy as payment instead of the face value.
Common Uses Of Whole Life Insurance
Whole life policies are well suited for needs that do not diminish over time. Some commonly found uses for whole life are:
- Family protection: To provide funds to support a surviving spouse and/or minor children, particularly for individuals who start a family later in life to pay final bills, such as medical or other estate expenses and federal and state death taxes.
- Business planning: Whole life insurance is often used for many different business purposes, such as insuring key employees, in split-dollar insurance arrangements, and funding nonqualified deferred compensation plans. Business continuation planning often involves using whole life insurance as a source of funds for buy-sell agreements.
- Accumulation needs: Some individuals will use the cash value feature of whole life as a way of accumulating funds for specific purposes, such as funding college education, or as a supplemental source of retirement income.
- Charitable gifts: To provide funds for a gift to charity.
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Things That Can Eat Into The Death Benefit
While the face amount of a policy generally doesnt change , that number doesnt necessarily equal the amount of money the policy beneficiaries will receive at the time of the insureds death.
If, for example, you bought the policy with an accelerated death benefit rider and used that rider, the amount of money you used will generally be deducted from the face amount. Or if you bought permanent life insurance and took out a loan against the policys cash value and died without repaying it all, the life insurer subtracts the outstanding money from the face amount to arrive at the death benefit they pay your beneficiaries.
All told, if your beneficiaries will rely heavily on your policys face amount, you should be mindful about choices you make while youre alive that could affect the death benefit they receive.
What Is The Face Value Of A Life Insurance Policy
The face value of a life insurance policy is the amount of death benefit you purchase when you take out the policy, and its a primary factor in determining the amount of premium you pay. The face value is stated in the policy documents, and it often, but not always, stays the same as the death benefit throughout the life of the policy.
Knowing when and how the face value might change can help you better manage an existing life insurance policy or better compare your options when shopping for a new one.
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Understanding What Face Value Means In A Life Insurance Policy
- Category: Life Insurance
- Posted: 23-Mar-2022
The face value of a life insurance policy is basically the amount of insurance you are buying and is determined when it is purchased. If you purchase a $1 million policy, then the face value is $1 million. When you purchase life insurance, its important to know what you expect it to be used for and whether the amount can sufficiently cover those expenses and costs. When you are ready to purchase your policy, asking questions will help you make a wise decision. Your insurance advisor will always be there to answer your questions and offer you the advice you need to make a good choice for your familys future. This article will help you understand the face value of your insurance policy better.
Selecting The Right Life Insurance
Choosing the right insurance is a matter of needs, preference and budget. Because of the variety of life insurance products available on the market, it is possible for most individuals, particularly heads of household, to obtain life insurance coverage that fits within their unique parameters.
The first step in selecting the appropriate life insurance is to determine how much coverage is needed based on the individuals financial situation. This can be determined online by using any of the insurance calculators provided by numerous companies.
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What Are The Tax Consequences
Death benefits are not taxable IF your beneficiaries receive them in one lump sum. Even if you only paid a portion of the premiums, and your employer paid the rest, the death benefit isnt taxed.
If your beneficiaries receive the death benefit in monthly payments versus one lump sum, they will owe taxes on the interest earned on the death benefit only. They wont pay taxes on the principal amount, but just the interest the balance makes before paying it to you.
When The Death Benefit Changes But The Face Value Does Not
Though the face amount and death benefit often move in tandem, like in the examples above, there are less common instances when they can differ. This happens primarily with permanent life insurance policies:
- Policy loans: If the policyholder takes out a loan against the cash value and does not pay it back, the death benefit will be reduced upon the death of the insured person, even though the face value wont have changed.
- Paid-up life insurance: Participating whole life insurance policies may pay dividends to policyholders in the form of paid-up additional life insurance, which increases the death benefit but does not change the face value of the original policy.
- Universal life insurance option 2: With a universal life insurance policy, you can select one of two death benefit options. In the first, the death benefit equals the face value of the policy. The second provides a death benefit equal to the face value plus the accumulated cash value, and so the death benefit can be greater than the face value.
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You Took Out A Loan Against Your Policys Cash Value
One of the perks of permanent life insurance is its ability to earn cash value over time. When youve built up enough cash value, you can begin borrowing against your policy.
While you dont need to pay back the loan, the outstanding sum will be taken from the death benefit when you die to repay your insurer.
Face Value Vs Cash Value
Although they sound similar, the cash value and face value within a life insurance plan are very different. The cash value functions like a savings account that the policyholder may be able to borrow from in a loan. This account is tax-deferred so it tends to grow at a steady rate.6
The cash value isnt accessible in all Aflac life insurance plans, but there are still other benefits to be considered.
On the other hand, the face value represents the monetary value of the death benefit plus the value of any additional benefits you choose to add to your policy.7 If you dont add on any additional riders, then the face value may equate to the death benefit amount alone.
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What Is The Face Amount Of Life Insurance
Most life insurance policies intend to provide financial protection for loved ones after you pass.2 The face value of life insurance is the dollar amount equated to the worth of your policy. It can also be referred to as the death benefit or the face amount of life insurance. In all cases, life insurance face value is the amount of money given to the beneficiary when the policy expires.3
Face Amount Vs Cash Value Vs Surrender Value:
We have discussed, extensively the concept of the Face Amount and Death Benefit, however there is another value associated with permanent policies: Cash Value. Cash Value does not pertain to term insurance. It does pertain to Whole, Universal, and Variable Life Insurance. Products that contain market exposure technically also have a “cash value” although the monies may not be in cash.
What is Cash Value: Cash Value is the excess money set aside in a whole life insurance policy as a type of pseudo savings account. The accounts are notorious slow growers. Meaning not nearly as much money as consumers think they should they should have, do they. In general Cash Value is NOT paid out at the time of death. The Face Value or current Death Benefit is.
Cash Value is there to access for policy loans, receive yearly dividends. Cash value accounts are often presented as a type of saving account for which the account holder may access. The truth is that they are rather difficult, often to gain access to. Typically policy loans require an interest payment be made by the policyholder.
So how does Cash Value get lowered to the Surrender Value? Basically there are contractual costs in the contract. Basically Fees. Fees for early termination, Other Fees.
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