How Do I Determine the Face Value of a Life Insurance Policy?

A permanent life insurance policy has a face value and a cash value, and they are two different figures:

  • The face value is the death benefit. This is the dollar amount that the policy owner's beneficiaries will receive upon the death of the insured. This figure is recorded in the schedule of benefits for the policy.
  • The cash value is the amount you would receive if you surrendered the policy early, forfeiting the death benefit in return for cash upfront. This is recorded on the monthly statements that insurers send their customers.

The cash value may also be referred to as the net surrender value.

Key Takeaways

  • The face value of a life insurance policy is the death benefit, while its cash value is the amount that would be paid if the policyholder opts to surrender the policy early.
  • Face value is the primary factor in determining the monthly premiums that will be owed.
  • Face value can be found in the statement of benefits, while cash value is on the monthly statement policyholders receive.

About the Face Value of Life Insurance

To calculate the full benefit that will be paid out to beneficiaries in the event of the insured person's death, consult the schedule of benefits in the policy.

Most life insurance companies also offer riders, which are additional benefits that can be included in a plan. For example, some riders stipulate that the face value doubles if the insured dies due to a specific type of accident.

Altogether, the face value plus the value of any additional benefits constitute the policy's total death benefit.

In most cases, the face value of life insurance is transferred to the beneficiaries tax-free.

How Face Value Influences Cost

Face value is one of the most important factors that contribute to the cost of a life insurance policy. Permanent policies have both a face value and a cash value, while term policies (which are less expensive up-front) only carry a face value.

For example, a person who seeks to buy a term life insurance policy from Company XYZ would expect to pay more for a $500,000 face value policy than for a $100,000 face value policy.

What Can Cause Face Value to Change?

There are many events that can trigger a change up or down in the face value of a policy.

On the plus side, the cash value can grow large enough that it actually causes a corresponding increase in the face value of the policy.

On the minus side, unpaid loans taken from the policy balance by the policyholder will be deducted from the policy's face value.

Any potential change in the face value of the policy will be addressed in the terms of the policy.

Advisor Insight

Steve Kobrin, LUTCF
The firm of Steven H. Kobrin, LUTCF, Fair Lawn, NJ

The key thing is to determine how big a face value to buy. To calculate it, start off by asking yourself these questions:

  • How much money will my spouse and children need to maintain their current quality of life?
  • How much will they need to pay my debts, taxes, and other estate-related costs?
  • How much will my favorite charities need to replace my donations?
  • Next, figure out the maximum length of time the coverage would be needed. For example, if your youngest child is two years old now, you’d want to make sure they have a sufficient income through college. That's another 20 years.

It may be more cost-effective to use several policies of different face amounts and guarantee periods to cover these various needs. Or, it may be simpler to have one big fat policy to cover everything.