What is the Face Value of Life Insurance?

iQuanti: All life insurance policies come with a death benefit. If you pass away while the policy is in force, the insurer pays this death benefit to your loved ones, helping them remain financially stable. This death benefit represents the face value of your policy. Face value is an important factor of any life insurance plan, as it will influence the policy's total cost. Here's how the face value of life insurance works and a few factors that can cause it to increase or decrease so you can compare options and find the right life insurance quote for you and your loved ones.

How does the face value of life insurance work?

The face value of your life insurance policy is the total amount your policy is worth, and typically reflects your death benefit amount. For instance, if you buy a life insurance policy with a $1 million death benefit, the face value of the policy will be $1 million. This is how much your beneficiaries will receive to cover expenses when you pass away.

What can cause life insurance face value to change?

Here are some things that could impact your life insurance policy's face value:

1. Adding a rider

Life insurance riders offer you extra benefits. For example, an accelerated death benefit rider may allow you to access the death benefit before you pass away. But keep in mind that using these riders and having some of your death benefit paid out early could reduce your face value.

2. Borrowing against the policy's cash value without paying it back

Life insurance policies with cash value, such as whole life insurance policies, let you take out a loan against the cash value when it's big enough. This loan requires no credit checks, has a low interest rate, and lets you pay back what you owe over time.

But if you die before repaying the loan, the insurer will take money out of your death benefit to pay the loan off. This will reduce the policy's face value and the amount your beneficiaries receive upon your death.

3. Withdrawing from the policy

Some policies let you withdraw from the cash value when it's grown large enough. But withdrawals may reduce your death benefit, therefore reducing your face value. Policyholders should be aware of this before withdrawing from their policy's cash value.

The bottom line

Your face value simply reflects your policy's total value and is equal to the death benefit your beneficiaries will receive in the event of your passing. Adding riders to your policy can change your face value. Meanwhile, receiving a portion of your death benefit early, borrowing against your policy's cash value, or withdrawing from your cash value can reduce the face value.

Ultimately, evaluate your life insurance needs before shopping around for a quote so you know what face value to look for. This will help you get enough coverage without exceeding your budget.