What Is the Face Value of a Life Insurance Policy?

The face value of a life insurance policy is the amount of death benefit purchased when the policy is purchased, and it is a major component in determining the amount of premium you pay. The face value is listed in the policy documentation and is frequently, but not always, the same as the death benefit throughout the policy's duration.

Definition and Example of the Face Value of a Life Insurance Policy

When a life insurance policy is issued, the face value, or face amount, is determined. It refers to the amount of death benefit acquired, which specifies how much money the policy will pay to the beneficiary or beneficiaries if the insured individual dies. The face value of a life insurance policy is the sum specified in the policy's description. A policy with a face value of $500,000 has a face value of $500,000. 

The face amount that a person applying for insurance can qualify for is determined by a variety of factors, including how much coverage they require, how much they can afford, and how much life insurance the company will extend to them (which may be limited by their age, health, or the amount of their existing life insurance coverage). 

In rare cases, the face value and death benefit amount may differ; insurers frequently allow you to modify or increase the face value of your insurance after it has been issued.

• Alternate name: Face amount

How the Face Value of a Life Insurance Policy Works

The face value can be considered as the beginning point for the death benefit—it establishes the death benefit and, thus, the premium at policy issuance. However, both the death benefit and the face value of the policy might vary during the policy's term.

When the Face Value (and Death Benefit) Changes

Here are several scenarios in which the face value and death benefit may change:

• Reduction on request: Insurers regularly cut the face value on request because it does not raise their liability or risk exposure. However, increasing the face value frequently necessitates reapplying for the increased amount of coverage.
• Decreasing term life insurance: A type of term life insurance in which the face value (and death benefit) decreases at regular intervals, such as once a year, until the policy's term expires. Policy premiums, on the other hand, remain constant during the term. A 30-year decreasing term policy, for example, could cover the lowering principal amount of a 30-year mortgage.
• Guaranteed insurability rider: This rider is available at the time of insurance purchase. It enables the insured to enhance the face value, or death benefit, at regular intervals, such as every five years until reaching a specified age, or in response to qualifying life events, like the birth of a child. The crucial point is that individuals can enhance the benefit without giving proof of insurability—they are not required to apply or answer medical questions.
• Renewable term life insurance: Many term life insurance policies are renewable once the term expires. The insured is not required to produce additional proof of insurability, but the new premium is calculated based on their present age (and the health in which they were when they took out the prior policy). Because the cost of insurance rises with age, some people choose to renew for a smaller face value with a lower premium.
• Variable life insurance: With variable life policies, you can invest the cash value into sub accounts similar to mutual funds. The face value and death benefit of the policy may increase or decrease depending on investment performance.
• Accelerated death benefit: Accelerated death benefit riders allow the insured individual to obtain the face amount of the policy while they are still alive. These riders are typically used to cover costs like managed home care, long-term care, nursing facility care, chronic or critical sickness, or disability. However, enabling these riders reduces the face value of the insurance proportionally.

When the Death Benefit Changes but the Face Value Does Not

Though the face amount and death benefit frequently move in lockstep, as seen in the cases above, there are times when they diverge. This is most common with permanent life insurance policies:

• Policy loans: If a policyholder takes out a loan against the cash value and does not repay it, the death benefit will be decreased upon the insured person's death, even if the face value remains the same.
• Paid-up life insurance: Policyholders of participating whole life insurance plans may receive dividends in the form of paid-up supplemental life insurance, which enhances the death benefit but does not modify the face value of the original policy.
• Universal life insurance option 2: With a universal life insurance policy, you can choose between two death benefit alternatives. In the first case, the death benefit equals the policy's face value. The second gives a death benefit equal to the face value plus the accrued cash value, allowing the death benefit to exceed the face value.

Face Value vs. Cash Value

Though the face value is sometimes the same as the death benefit, it should never be confused with the cash value of a policy. This distinction is only applicable to permanent life insurance plans, which accumulate cash value; term policies do not.

Permanent policies contain a tax-deferred cash value account that offsets rising insurance costs as you get older, and it's nearly usually less than the face amount. In most circumstances, the death benefit, not the cash value, is what your beneficiaries will receive. If, on the other hand, you choose Option 2 on a universal life policy (when the policy is issued), the death benefit will equal the face value plus the cash value, so your beneficiaries would receive both.