The amount of death benefit you acquire when you purchase a life insurance policy is known as the face value, and it is a major determinant of the premium cost. The face value is specified in the policy paperwork and, more often than not but not always, remains constant throughout the insurance.
You may better manage an existing life insurance policy or evaluate your alternatives while looking for a new one by being aware of when and how the face value may change.
Definition and Example of the Face Value of a Life Insurance Policy
When a life insurance policy is written, the face value, also known as the face amount, is determined. The death benefit amount purchased, represents the sum 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.
How much coverage a person needs, how much they can pay, and how much life insurance the firm will offer them all affect the face amount that person applying for insurance can qualify for (which could be limited by their age, health, or the amount of their existing life insurance coverage).
In some cases, the face value and death benefit can be different. After your policy was issued, insurers frequently allow you to decrease the face value and, in other cases, increase it.
- Alternate name: Face amount
How the Face Value of a Life Insurance Policy Works
The face value establishes the death benefit at policy issuance and, consequently, the premium, serving as the death benefit’s starting point. But occasionally, both the face value and the death benefit change during the policy’s term.
When the Face Value (and Death Benefit) Changes
The face value and death benefit may alter in the following circumstances:
- Reduction upon Request: Since this doesn’t increase the insurer’s liability or risk exposure, it happens regularly that the face value is reduced upon Request. The additional amount of coverage must typically be reapplied if the face value is increased.
- Term life insurance with a declining face value: This sort of term life insurance sees its face value (and death benefit) decline over time, sometimes once a year, until the policy’s term is up. But the cost of the policy does not change throughout the period. For instance, a 30-year mortgage’s reducing principal amount could be covered by a 30-year decreasing term policy.
- Rider for “guaranteed insurability”: This addition to a policy is possible at the time of purchase. It allows the insured person to increase the face value, or death benefit, at regular intervals, such as every five years until a certain age, or upon qualifying life events, such as the birth of a child. The key is that they can increase the benefit without providing evidence of insurability—they don’t have to apply or answer medical questions.
- Renewable term life insurance: Many term life insurance contracts are renewable after the initial term has passed. The new premium is determined by the insured’s current age, but they are not required to show additional proof of their ability to be insured (and the health they were in when they took out the original policy). Some people decide to renew their insurance for a lesser face value with a lower premium because the cost of insurance rises with age.
- Variable life insurance: Variable life insurance allows you to place the cash worth of the policy in subaccounts that resemble mutual funds. The face value and death benefit of the policy could rise or fall according to the performance of the investments.
- Accelerated death benefit: Riders that offer an accelerated death benefit give the insured access to the face value of the policy while they’re still living. These riders are generally used to pay for expenses such as the costs of managed home care, long-term care, nursing home care, chronic or critical illness, or disability. But activating these riders reduces the policy’s face amount proportionately.
When the Death Benefit Changes but the Face Value Does Not
Although the face amount and death benefit frequently move together, as in the aforementioned cases, there are rarer circumstances in which they can diverge. This primarily occurs with permanent life insurance contracts:
- Policy loans: Even though the face value won’t have changed, the death benefit will be lowered if the policyholder borrows money against the cash value and does not repay it before the insured person passes away.
- Paid-up additional life insurance: Policies with participating whole life insurance may pay dividends to policyholders in the form of paid-up additional life insurance, which raises the death benefit but leaves the original policy’s face value untouched.
- Option 2 for universal life insurance: You have a choice of one when purchasing a universal life insurance policy of two death benefit options. 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.
Face Value vs. Cash Value
Even though the face value and death benefit are frequently the same, the two should never be mistaken for a policy’s cash value. This distinction is only relevant for permanent life insurance because term life insurance does not build up cash value.
| Definition | Access during life | Access after death | |
| Face value | The death benefit at policy issue, which can sometimes be increased after policy issue | Cannot be accessed | Cannot be accessed |
| Death benefit | The amount paid to beneficiaries upon the death of the insured person | Can be accessed via an accelerated benefit rider | Is paid to beneficiaries |
| Cash value | An internal cash account in permanent life insurance policies | Can be accessed via withdrawals or policy loans | Generally does not add to the death benefit, except on some universal life policies |
A tax-deferred cash value account, which is usually always less than the face amount, is a feature of permanent insurance policies that helps offset the rising cost of insurance as you age. The amount that your beneficiaries will get is often the death benefit rather than the cash value. The death benefit on a universal life policy, on the other hand, will match the face value plus the cash value if you choose option 2 (when the policy is issued), meaning your beneficiaries will receive both.
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