How do I determine the face value of a life insurance policy?
For any life insurance policy, the face value is the death benefit. This is the stated dollar amount that the policy's beneficiaries receive upon the death of the insured. In most cases, the face value is transferred to the beneficiaries tax free. A policy's face value can be supplemented by additional benefits that have been added beyond the basic plan coverage. Face value is different from cash value.
To calculate the full benefit that is paid out to beneficiaries in the event of the insured's death, consult the schedule of benefits in the policy. Most life insurance companies also offer riders, which are additional benefits that can be purchased on a plan. For example, some riders stipulate that the face value doubles if the insured dies because of a specific type of accident. All together, the face value plus additional benefits are what constitute the policy's total death benefit.
The Importance of Face Value
Face value is one of the most important factors that influence the cost of a life insurance policy. A 25-year-old woman trying to buy a term life insurance policy from Company XYZ would expect to pay more for a $500,000 face value policy than a $100,000 face value policy, for example. The face value is the amount that the insurance company is on the hook for should the woman die during the course of the term.
There are many different events that can trigger a change in face value for a policy. In some policies, cash value can potentially grow large enough that it actually causes corresponding increases in face value. Unpaid loans from an insurance policy can be deducted from the policy's face value. Sometimes, a reduced face value can be paid out in the event of serious injury to the insured. Any potential change in face value is addressed in the policy itself.
Face Value = Death benefit
i.e. John has a $1,000,000 life insurance policy that has a face value or death benefit of $1,000,000. At John's death, his beneficiaries will receive $1 Million.
Face value DOES NOT equal the value of your policy. John is 78 years old, has had a 20 year term policy for a $1 million face value that he purchased at age 58 and has been paying $3,700/year for for the past 20 years, or a total of $74,000. His policy is now coming due, and his "guaranteed renewable premium" is going to be repriced as a 78 year old, and his cost will now be $20,000/year.
John can simply let his policy expire, and not make any more payments, and then his policy would be worth nothing, or he could convert his policy into a permanent $1 Million policy and sell that policy to a life settlement company and receive $200,000.
The premise is that although your insurance company may tell you that your policy doesn't have any cash value, it still may have a value in the open market.
You'll find the face value on your actual policy. Death benefits can rise depending on the death benefit option selected at the time you applied for the policy, and can fall as you take withdrawals from the policy in the form of loans.
If you can't find your policy, a quick call to the Customer Service department of your insurance company will give you the answer. Good luck!
The face value of a life insurance policy is the amount of money your beneficiaries will get when you pass on. To calculate it, start off by asking yourself these questions:
How much money will my spouse and children need to maintain their quality of life?
How much money will my heirs need to pay off taxes, debts, final expenses, and other estate- related costs?
How much money will my businesses need to replace the services I provide to them?
How much money will my favorite charities need to replace the donations I have been giving them?
Of course, not everybody has a family, or a business, or a favorite charity. So you plug in the amounts that fit your particular life.
Next, figure out for how long you need the coverage for any category. For example, your youngest child maybe two years old. So, you may need money for your family for the next 20 to 30 years. However, you may plan on working at your current business for only the next 10 years. It may be that you use several policies to cover these various needs, of different face amounts and different guarantee periods. It may be simple to have one big fat policy to cover everything, but it will probably be more cost-effective to have different policies for different strategies.
When you get prequalified for coverage, this is a key item that should be addressed. When you finally apply for coverage, you should be very clear on what your needs are for life insurance, how much benefit would do the job, and for how long you need that coverage. Feel free to reach out to me with any additional questions.
It depends on what the life insurance policy is being used for. If it is being using for death benefit coverage, you will want to complete a full needs analysis to determine the face amount. If the life insurance is being used as a tax advantaged investment that will be used during the insureds life, a minimum fave amount can usually be calculated by the insurance carrier to remain within the IRS modified endowment contract rules.
The information, data, analyses and opinions contained herein do not constitute legal advice offered by Kinetic and are provided solely for informational and educational purposes. While the information and statistical data contained herein are based on sources believed to be reliable, Kinetic does not represent that it is accurate and should not be relied on as such or be the basis for a decision. Kinetic Financial & Insurance Solutions, Inc. and Kinetic Investment Management, Inc. are two separate entities. Insurance products and services are offered and sold through individually licensed and appointed agents in all appropriate jurisdictions under Kinetic Financial & Insurance Solutions, Inc. Investment Advisory Services are offered through Kinetic Investment Management, Inc. a registered investment adviser.