When you buy a permanent life insurance policy such as a whole, universal, or variable life policy, you may discover that the policy has two vales, the face value and the cash value. These are not variations of the same value, but are actually two different accounts associated with the policy.
Face value is the amount you purchase the policy for, and is used for all life insurance policies, even term life. Regardless of the performance of the policy investments, the face value of the policy will not change. For example, if you purchase a whole life policy for $200K, your named beneficiaries will receive the face value after you pass away even if the investments of the policy have gone bust.
The cash value associated with a policy behaves much differently. The policy begins with a $0 cash value, and that amount increases over time. The way it works is that a portion
of each premium goes into the cash value, and then the accumulated amount earns interest on the value as well. When the policy investments perform well, the cash value can become quite large, but poorly performing investments can result in the cash almost completely disappearing.
If you can borrow against your life insurance policy, it is the cash value that you borrow against, not the face value. You still have to pay back the loan and interest charges, but there is no credit check required to get a loan against a life insurance policy. If you pass away before the loan is repaid, the balance owed will be subtracted before the policy pays out to your chosen beneficiaries. In some rare cases, the outstanding balance may exceed the cash value of the policy, in which case the difference is subtracted from the face value when the policy comes up for settlement.
answered Apr 7, 2014 by anonymous