Understanding how life insurance works can be difficult, especially when you don’t understand the terminology included in your policy. For this reason, you should start by knowing two key terms you may find in any life insurance policy you review for purchase: cash value
and face value
. Both cash value and face value play a vital role in life insurance policy, but knowing how they work and their differences will help clear up some common life insurance misconceptions and provide you with a better understanding of how your policy works.
Whether you’re looking for a policy that provides a large death benefit for your beneficiaries or a policy that allows you to help supplement your income in retirement, cash value and face value both meet very different needs under very different price points.
What is a Life Insurance Face Value?
Face value can be found in any type of life insurance policy – term, whole, or other – and may also be known as the policy's death benefit. In fact, according to Investopedia, “For any life insurance policy, the face value is the death benefit. The stated dollar amount that the policy’s beneficiaries receive upon the death of the insured.”1 In some cases, the face value of the life insurance policy may be the most important contributing factor to the policy’s overall cost.1 That is to say, a higher face value (death benefit) may result in higher monthly premiums for the insured.1
In addition, it is worth noting the face value of a policy can change over time, either through annual policy changes or through a rider. One of the most common examples is a policy change through a rider. For example, if you have a rider in your policy stating the face value of your policy doubles when the insured dies due to a specific type of accident, your face value may change depending on the death of the insured.1 You can find the face value of your policy in the schedule of benefits provided to you.
What is a Life Insurance Cash Value?
Cash value is most commonly associated with permanent life insurance policies such as whole life, as it features a cash value component not usually associated with term life insurance while providing coverage for the policyholder’s life.2 Unlike face value, which can only
be received and used upon the death of the insured,1 cash value can be used for an array of purposes while the insured is still alive.2 For example, living policyholders can use the cash value component of their life insurance policy to supplement their income, pay off their loans, take a vacation, or however they see fit.
In addition to their previously mentioned differences, a cash value life insurance policy is typically more expensive than term life insurance, which usually only offers a face value component.2
Face value and cash value are two very different components of a life insurance policy, and understanding their differences can help you make the best life insurance decision for both you and your family. Whether you’re looking for a policy that provides a large death benefit for your beneficiaries or a policy that allows you to help supplement your income in retirement, cash value and face value both meet very different needs under very different price points. If you’re still unsure of how face value and cash value act within a policy, or which would be best for you, contact your local insurance agent for more information.