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How to determine face value in life insurance

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One of the terms you may hear referenced when you’re talking about life insurance is face value. It is often confused with another common insurance term, cash value. But what is the “face value” amount in life insurance?

In this article, we’ll explain what face value in life insurance means, and look at why it’s an important component of your life insurance policy.

What is face value in life insurance?

Simply put, the life insurance face value — also called the death benefit — is the amount that your beneficiary will receive when you die. If you purchase a policy for $100,000, for example, that amount is the face value of your policy, and that’s the amount that your beneficiaries will receive if you should die while the policy is in effect.

Face value is different from cash value. Cash value is the amount you receive from some policies if you surrender the policy early. But this is only true for permanent forms of life insurance.

There are two primary types of life insurance policy: term and permanent. Term insurance has a face value, but no cash value; you won’t receive a payout if you surrender the policy before the term is over. 

Permanent policies, however, include both the death benefit as well as a savings component, where part of your premium is placed to earn interest. That savings account constitutes the cash value. If you decide to give up or surrender the policy, you will receive this amount back. It’s also the amount against which you can borrow from your policy.

To summarize, all life insurance policies have a face value, or death benefit. But only permanent types of policy, such as whole life insurance, also include a cash value. 

How to calculate the face value of a life insurance policy

Calculating the face value of your life insurance policy isn’t hard. You’ll 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 policy’s cash value has accumulated enough to be added to your death benefit.

Finally, if you have taken out a loan on your policy and haven’t paid it back — or don’t intend to pay it back — subtract the amount of the loan from the previous total. The final number will be your current face value. 

How are face value and policy cost related?

The basic rule here is that the higher the face value, the more you will pay in premiums. For example, a policy that will pay out $500,000 will cost more in annual or monthly premiums than a policy that has a face value of $100,000.

However, that doesn’t mean that if you and your neighbor each have a policy for $100,000, you’ll both be paying exactly the same premium. Factors such as your age, gender and even your marital status play a role in determining your rate, and extra endorsements — which may alter your face value — also add to the cost.

When does the face value of a life insurance policy change?

The face value of a policy isn’t written in stone — it can change depending on variables unique to each person and depending on the policy type. 

  • Cash value – If the cash value of a permanent policy accumulates to a certain level, it may cause an increase in the policy’s face value. 
  • Riders – Face value may also be increased through riders, which add benefits to the policy. For example, you may have a disability income rider on your policy that increases the face value by a payout if you become disabled while the policy is in force. Some policies increase the face value depending on the manner of your death. 
  • Loans – Conversely, the face value can decrease if you take out a loan on your permanent insurance policy, because you are tapping into the cash value of the policy. If you die before you have paid back the loan, the face value will decrease by the amount of the loan. 

How the type of life insurance you have affects the face value

If you have a simple term policy, which doesn’t accumulate a cash value over the years, your face value will similarly be simple. It will amount to the stated death benefit plus any rider benefits. It’s unlikely that the face value will change during the course of your policy.

A permanent life insurance policy is more complex; because it has the added functionality of having a cash value, your face value may increase or decrease depending on the elements discussed above. 

Because of the changing nature of the face value for a permanent life insurance policy, it’s a good idea to recalculate the face value every year or so to evaluate where it stands. If your beneficiaries are expecting a certain payout, it would be unpleasant for them to discover after your death that a loan has reduced the death benefit significantly. 

The takeaway:

  • The face value of a life insurance policy is the death benefit.
  • Face value is different from cash value, which is the amount you receive when you surrender your policy, if you have a permanent type of life insurance.
  • Face value is calculated by adding the death benefit with any rider benefits, and subtracting any loans you’ve taken on the policy.

Knowing the face value of your life insurance policy helps you to understand the dollar value of the policy. Depending on what type of policy you have — term or permanent — the face value may fluctuate. Factors such as cash value and loans taken out against the policy value can ultimately affect the face value of permanent life insurance policies.

Mary Van Keuren

After 30 years as a writer and editor in academia, Mary now writes full-time for the insurance and finance industries. Her work has appeared on Reviews.com, TheSimpleDollar.com and Bankrate.com, as well as other consumer-focused websites.

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