How to Figure Out the Face Value of a Life Insurance Policy: 3 Steps

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The life insurance industry has a language all its own, and if you’re confused by the terminology, you’re not alone. Face value, cash value, death benefit, split-dollar, reverse split-dollar, accelerated death benefit. These are just a few of the dozens of terms you need to know if you want to understand the life insurance business.

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Chances are you’re only interested in your policy, the one you’ve got tucked away in your desk drawer. You probably have the amount you pay each month for it memorized, but there’s one more number related to it that means much more to you—the face value amount. 

What Does the Face Value of a Life Insurance Policy Mean?

If you want your life insurance policy to protect your loved ones financially when you die, you must get one thing correct: the face value.

The face value of something is how much it’s worth. For example, if you’re selling your car at face value, you’re selling it for the dollar amount it’s worth. No more and no less.

The same holds true for life insurance. The face value of your life insurance policy is printed on the first page of the policy itself. If it says $500,000 in life insurance coverage, your policy’s face value is $500,000. Face value is sometimes referred to as “face amount’ or “coverage amount.”

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What’s the Difference Between the Face Value and the Death Benefit?

Some people are mistaken when they say that the face value is the same thing as the death benefit paid to your beneficiaries. That’s not the case.

As stated earlier, the face value is printed on your policy when it’s delivered to you. However, just because the face value is declared on the application and the subsequent policy issued, it doesn’t mean your beneficiaries will receive a check for that amount when you die.

The face value is the initial amount of money on your application when you purchase the policy and is intended to be paid as a death benefit to your heirs. But the death benefit is the actual dollar amount the insurance company pays to your beneficiaries. In many instances, the face value and the death benefit are identical amounts. 

For example: John takes out a $1 million life insurance policy. He dies. John’s heirs receive $1 million from the life insurance company. Very straightforward.

But that’s not always the case. There are a few cases in which the face value doesn’t equal the death benefit. Let’s look at several of them.

Accelerated death benefit 

Many policies contain a clause that will accelerate a portion of the death benefit amount (typically 25% - 75%) if you’re diagnosed with a terminal illness. Many people use this accelerated benefit to pay for medical treatment, or in some cases, to enjoy their final months doing something they enjoy.

When you pass away, your beneficiaries will collect the face value of the policy minus the amount you received from the life insurance company while you were still alive. 

For example: You have a policy with a face value of $100,000. Using the accelerated death benefit, you receive $50,000 from the insurance company while you’re still alive. This means your beneficiaries will receive $50,000 as the death benefit when you pass away. ($100,000 face value minus $50,000 paid out while living = $50,000 death benefit.)

Loans or withdrawals 

One of the benefits of permanent life insurance, such as whole life insurance or universal life insurance, is that a portion of the premium you pay each month goes into a “cash value” component of your policy. This money is available to you to borrow (a loan) and is treated as a lien on your death benefit. 

This means that if you didn’t repay all or a part of the loan, your beneficiaries would collect a death benefit equal to the face value minus the loan.

For example: You have a life insurance policy with a $500,000 face value. While alive, you borrow $100,000 from the policy’s cash value. When you die, your beneficiaries will receive a $400,000 death benefit because the outstanding loan balance was subtracted from the face value.

Universal life policy 

If you own a universal life policy, you can choose between two death benefit options:

  • Option A: Also known as a level death benefit, your beneficiaries will receive the purchased face value when you first took out the policy (the amount in the application and also printed on the policy's first page).
  • Option B: Also known as the increasing death benefit, your beneficiaries will receive the face value plus the cash value that has accumulated in your policy throughout the years.

Graded benefit policy 

If you buy a “guaranteed issue” life insurance policy (you can’t be declined for health reasons), your death benefit is “graded,” meaning that a different death benefit is paid to your beneficiaries if you die within two years of purchasing the policy, not the face value of the policy. 

For example: You bought a $20,000 face value policy and died eight months later. Your beneficiaries wouldn’t receive the entire $20,000 you applied for; they’d collect the total amount of premiums you paid plus 10% in interest. 

Misrepresentation on the application

If you were intentionally dishonest when you completed your life insurance application, it could negatively impact your policy's death benefit. If your life insurance company discovers any misinformation you provided, they can reduce your policy's face value or not pay out any death benefit at all. 

To best protect your loved ones, always be totally truthful when you fill out your life insurance application. Insurance companies will check with the Medical Information Bureau when you apply, and they’ll be checking your medical records. When a death claim is filed, they’ll also do their diligence and look at the cause of death and compare it to your application as they look for any discrepancies. 

Steps For Determining the Face Value of a Life Insurance Policy

You’re going to find it relatively easy to figure out the face value of a life insurance policy. There are the three easy steps you’ll take:

  • First, get your policy and look at the face value printed on the policy. 
  • Second, look at any riders that you purchased when you took out your policy. You may have additional death benefits in these riders to add to your total. 
  • Finally, subtract the amount of any unpaid loans from the previous total of steps one and two. This final number will be your face value.

For example: You see that your policy has an initial face value of $200,000. You have an “accidental death benefit” rider that pays twice the face value if you die by accidental causes ($400,000). Then you check your statement and see that you have a $10,000 loan balance from your policy. 

Using this example, what’s the payout to your survivors? If you die due to an accident, your survivors will receive $400,000 (twice the amount of the initial face value) less $10,000 (outstanding loan balance) for a total payout of $390,000.

What Should the Face Value of Your Life Insurance Policy Be?

The face value of your life insurance policy, or how much life insurance you need, will depend on your particular situation. According to many life insurance experts, 10 to 15 times your income is a reasonable estimate. You may also want to add a little more as a buffer to cover unexpected expenses, like surprise medical bills.

To determine what would be an accurate amount for the face value of your policy, you’ll want to make sure you factor in the following expenses:

  • Outstanding debts
  • The cost of raising your dependents
  • College tuition
  • Everyday bills and expenses
  • Final medical bills
  • Funeral costs

Some insurance company websites have life insurance coverage calculators to help you determine the correct face value you need.

When Should You Increase the Face Value of Your Life Insurance Policy?

Besides death and taxes, the only thing certain in life is change. For that reason, it’s important to re-evaluate your life insurance coverage annually and make sure that your policy's face value is still sufficient to meet the needs of your loved ones. Here are three times in life when you may want to increase the face value of your policy.

  1. Your family has grown. When you get married, you want to be sure to have coverage for both you and your spouse. If you start to have children, your financial obligations increase considerably after each child is born. Also, if you’ve started to care for an aging adult, like a parent, make sure your life insurance coverage takes continuing care for them into account.
  2. Your career and income have changed. Perhaps you’ve changed jobs or transitioned into an entirely new field. Or maybe you’ve received a promotion resulting in a bump in salary. As your income goes up, so should the face value of your policy.
  3. You have new financial obligations. Have you bought a house? Started a business? Have you taken on any new major, long-term financial obligations? As you take on more financial responsibilities, you’ll need more life insurance coverage to make sure your loved ones don’t inherit any unexpected costs they can’t cover on their own.

Is the Death Benefit Taxable?

Any death benefit paid to your beneficiaries in a lump sum is not subject to income tax. If you die owning a policy with a $400,000 death benefit, your heirs will receive the full $400,000 and pay no income tax on that amount.

This is true whether your life insurance is part of a group plan, where your employer subsidizes part of the premium, or if it’s an individual policy and you paid all of the premiums.

An exception would be if your beneficiary elected to receive the death benefit in monthly or annual installments instead of a lump sum. In that case, the interest on the original amount is taxable, and the portion that is principal is tax-free.

The Final Word on Face Value

The face value of your policy matters. It’s the reason you bought your life insurance policy: because it will provide financial support to your loved ones if you’re not around to do that. Purchasing a policy with the correct face value and ensuring your beneficiaries receive the full death benefit will protect their long-term financial health and give you greater peace of mind. 

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