The face value of your life insurance policy is the dollar amount, or death benefit, your beneficiaries receive if you die while your policy is active. It’s so important, Phil Collins even released an entire album about it.
Some permanent life insurance policies have both a face value amount and a cash value amount. We’ll explain the differences and everything you need to know below to get the most out of your life insurance.
What is face value?
The face value of something is the dollar amount that it equates to. For example, when you’re selling your furniture at face value, you’re selling it for the dollar amount it is worth. No more and no less.
What is the face value of life insurance?
The face value of life insurance is how much your policy is worth. It’s also how much life insurance money is paid out when the policyholder dies. Within your policy, it’s officially denoted as the death benefit.
Face value can also be used synonymously with “face amount” or “coverage amount.”
The exact face value of your life insurance policy will depend on how much coverage you bought. If you bought $1 million in life insurance coverage, your policy’s face value is $1 million, which is also how much your beneficiaries will receive if you die while your policy is active.
What should the face value of your life insurance policy be?
Your policy’s face value should be high enough to ensure your family’s financial protection, typically 10 to 15 times your income, according to Policygenius experts. Additionally, you may want to add an extra cushion to cover unexpected costs, like surprise medical bills.
To determine the right face value of your policy, account for covering the following expenses:
The cost of raising your dependents
Everyday bills and expenses
Final medical bills
Check out our coverage calculator below to get an idea of what face amount is best suited for your particular needs.
Face value eligibility
Insurers evaluate your financial justification for life insurance before they grant you coverage. This includes verifying that you’re eligible for the face amount of coverage you’re asking for based on your age, income, and assets.
Your income and age determine how much coverage you can get, though other factors (like the number of dependents you have) can justify some requests for a face value that isn’t proportionate to your net worth.
For example, if you’re under the age of 30, some insurers may let you get a policy with a face value that is as much as 40 times your income. But in your 60s, this number may drop down to 10 times your income.
The exact amount you’re eligible for depends on your insurer.
Face value vs. cash value
The cash value of a life insurance policy is meant to be accessed while you’re still alive — it can be used to pay your policy premiums, withdrawn for cash, or borrowed against.
While the cash value can accumulate over your policy’s term, it doesn’t increase a whole life insurance policy’s face value because it’s never added to the policy’s death benefit.
If you die and haven’t used the cash value, the funds go back to your insurance company, not your beneficiaries. Your beneficiaries only receive the death benefit after you die.
How to change your face value
There are a few circumstances where the face value of your policy will change. However, it’s possible to decrease how much money your beneficiaries get when you die. The following instances can alter the face amount of your coverage.
Using a rider to get some of the death benefit early
Some riders pay out part of the death benefit while you’re still alive.
The accelerated death benefit rider, for example, pays out the death benefit if you’re diagnosed with a terminal illness, while an accidental death and dismemberment rider (AD&D) will pay out if you lose a limb or digit in an accident.
If you have one of these riders as a part of your coverage and the need arises to use it, the money you get will be taken from the death benefit, changing the ultimate face value of your policy.
Whatever is left will be the final face amount that your beneficiaries receive.
Taking out a loan against the policy’s cash value
If you have a whole life insurance policy with a cash value, how you utilize that cash value can impact the face value of your coverage. Most notably, this can happen if you take out a loan against your policy’s cash value and don’t repay the funds before you die.
Any money you owe will be taken from the death benefit to repay your insurer, and whatever is left will be paid out to your beneficiaries.
Because taking out a loan against your policy’s cash value can risk your family’s long-term financial security, using your life insurance policy for a loan should be a last resort.
Lying on your life insurance application
Any intentional dishonesty on your life insurance application may be considered insurance fraud and have ramifications for your beneficiaries’ financial health.
If your insurer finds out about any misinformation you provided, they can reduce the face amount of your policy or not pay out any money whatsoever.
To protect your loved ones from any chance of your insurer decreasing the life insurance face amount, be as honest as possible on your life insurance application.
The face value of your policy is important because it’s likely why you’re buying life insurance coverage in the first place — to provide financial support to your loved ones in case you’re no longer around to do so.
Getting a policy with the right face amount and ensuring your beneficiaries receive the full value of your policy protects their long-term financial health.