The Definition of Face Value in Life Insurance

what is face value of life insurance

The term "face value" in life insurance refers to the death benefit that is paid to beneficiaries upon the death of the insured. Depending on the type of insurance policy, the death benefit may decrease over time, such as with credit life insurance purchased to cover a home mortgage that decreases as the mortgage is paid off.

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Types of Life Insurance Policies

Life insurance policies are available with two alternative features: protection policies only and dual feature protection and cash value policies. Protection policies pay only a death benefit, or the "face value." Term life policies are protection policies. The second kind of policy, the dual feature cash value and protection policy, builds cash value separate from the face value through a lump sum payment or regular periodic payments. The death benefit is therefore the face value plus all increases in cash value from dividends or investments. The cash value feature is only available with whole life, universal life and variable life

policies.

Term Life Policies

Cash Value Policies

Unlike term policies where the premium pays only for the death benefit, cash value premiums fund both the death benefit and the investments necessary to build up the cash value. Accordingly, their premiums are higher. Cash value policies are typically "front-loaded" with commissions and fees during the early years of the policy. Consequently, cash value builds slowly. Cash value earns interest, however, and can provide a handsome "living benefit" to the policy holder in later years if left untouched.

Loans Against Cash Value

An attractive feature of cash value policies is that policy holders can access the cash value by way of loans if necessary. Any outstanding loans against the cash value at the time of the policy holder's death are deducted from the face value of the policy. Therefore, "face value" with cash value insurance policies is the "death benefit" plus cash value less any outstanding loans against cash value.

Selecting the Right Life Insurance

Source: ehow.com

Category: Insurance

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