Life Insurance

How Do I Determine the Face Value of a Life Insurance Policy?

A permanent life insurance policy has a face value, also known as the death benefit. This is the dollar amount that the policy owner’s beneficiaries will receive upon the death of the insured. The cost of an insurance policy is directly proportional to the face value: the greater the premiums paid, the more death benefit it will buy.

The initial face value of an insurance policy will be stated on the policy itself. Any future changes that are scheduled will appear in the policy’s illustration table. The death benefit can also change if you buy additional insurance (known as paid-up additions or PUA) or decrease if you take out some cash value.

Key Takeaways

  • The face value of a life insurance policy is the death benefit.
  • Face value is the primary factor in determining the monthly premiums that will be owed.
  • Face value can be found in the statement of benefits.
  • Permanent life insurance may also have a cash value less than the face value, which is the amount that would be paid if the policyholder opts to surrender the policy early.
  • The death benefit can change over time as additional insurance is purchased or as the cash value inside the policy rises or falls.

The Face Value of Life Insurance

Life insurance policies are intended to provide financial resources to those impacted by the death of another individual. For instance, a parent’s death can result in a loss of income making it more difficult to save for college or pay off a mortgage on the family home. The death benefit received from life insurance can help replace this lost economic value in the event of an untimely death.

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The death benefit can also be used to establish a trust, give to charity, or leave an inheritance even in older age.

The original amount of insurance purchased is known as the policy’s face value. In the event of the insured’s death, this is the base amount that will be paid to the policy’s beneficiaries. But, the total death benefit can change over time. Paid-up additional insurance increases the death benefit, for example as dividends are paid into the policy. Withdrawals of cash from the policy, on the other hand, will reduce the death benefit, perhaps below face value.

How to Determine Face Value

To calculate the full benefit that will be paid out to beneficiaries in the event of the insured person’s death, consult the schedule of benefits in the policy. Most life insurance companies also offer riders, which are additional benefits that can be included in a plan. For example, some riders stipulate that the face value doubles if the insured dies due to a specific type of accident.

Altogether, the face value plus the value of any additional benefits constitute the policy’s total death benefit.

In most cases, the face value of life insurance is transferred to the beneficiaries tax-free.

How Face Value Influences Cost

Face value is one of the most important factors that contribute to the cost of a life insurance policy. Permanent policies have both a face value and a cash value, while term policies (which are less expensive up-front) only carry a face value.

For example, a person who seeks to buy a term life insurance policy from Company XYZ would expect to pay more for a $500,000 face value policy than for a $100,000 face value policy.

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As an example, the table below shows the hypothetical premiums used to buy different amounts of 20-year term life insurance coverage for a healthy, non-smoker 30-year old man.

 Face Value Monthly Premium
$100,000  $10
$250,000 $15
$500,000 $25
$750,000 $34
$1,000,000 $42
$2,000,000 $77

The cash value is the amount you would receive if you surrendered the policy early, forfeiting the death benefit in return for cash upfront. This is recorded on the monthly statements that insurers send their customers. The cash value may also be referred to as the net surrender value.

What Can Cause Face Value to Change?

There are many events that can trigger a change up or down in the face value of a policy.

On the plus side, the cash value can grow large enough that it actually causes a corresponding increase in the face value of the policy. This can result from dividends that are credited to the policy, which increases the total cash value. Policy owners may also be able to purchase additional insurance (PUA) within the same policy by adding cash to it, increasing the death benefit.

On the minus side, unpaid policy loans taken from the policy balance by the policyholder will be deducted from the policy’s face value. If you fail to pay your premiums, the insurance company will begin to use the cash value in the policy to cover these payments, also reducing the cash value and the death benefit, in turn. Finally, if you make withdrawals (known as surrenders) from the policy as cash, it will reduce the death benefit. Note that you can reduce the death benefit well below the original face value if the cash amount is depleted too much.

Any potential change in the face value of the policy will be addressed in the terms of the policy.

How Do You Determine the Right Face Value You Need for Life Insurance?

Steve Kobrin, LUTCF
The firm of Steven H. Kobrin, LUTCF, Fair Lawn, NJ

The key thing is to determine how big a face value to buy. To calculate it, start off by asking yourself these questions:

  • How much money will my spouse and children need to maintain their current quality of life?
  • How much will they need to pay my debts, taxes, and other estate-related costs?
  • How much will my favorite charities need to replace my donations?
  • Next, figure out the maximum length of time the coverage would be needed. For example, if your youngest child is two years old now, you’d want to make sure they have a sufficient income through college. That’s another 20 years.

It may be more cost-effective to use several policies of different face amounts and guarantee periods to cover these various needs. Or it may be simpler to have one big fat policy to cover everything.

Is the Face Amount the Same as the Death Benefit?

The face amount is the initial death benefit on a life insurance policy. But, as the cash value of the policy changes over time, it can alter the total death benefit either above or below the face value.

Can I Withdraw My Cash Value From Life Insurance?

Yes, but doing so will reduce the death benefit accordingly. If you withdraw (surrender) all of the money from a policy, it will terminate.

The Bottom Line

The face value of a life insurance policy is the initial death benefit it will pay out if the insured passes away. For a term policy, this will remain the same over its life. For a permanent policy, the actual death benefit may grow or decrease as the cash value portion of the policy changes.

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