The face value of a life insurance policy, also known as face amount, typically refers to the overall monetary value of the policy, riders, as well as the death benefits of the policy. Simply put, the face value of a life insurance policy means the actual worth of the policy and the exact amount that the beneficiaries are given in the event of the policyholder’s death.
It is important to note that if you borrowed against the cash value of your policy while you are alive and it was not repaid before you died, it would lower the death benefit your beneficiaries will receive.
How Does Face Value Of Life Insurance Work?
When applying for a life insurance policy, you will be required to choose a face amount based on your financial needs. Ensure you factor in your living expenses, debts, and future financial obligations. Be aware that the face value of your policy affects your premiums. If you choose a higher face value, be ready to pay higher premiums.
If the policyholder dies while the policy is still in effect, the insurance company will pay the face value of the policy directly to the beneficiaries, ultimately giving them the financial support they need while you are no more. Some insurance companies may allow you to adjust your life insurance face amount if you want to increase or decrease your coverage, as the case may be.
Face Value vs. Cash Value
If you have a life insurance policy, you must have come across these two terms: face value and cash value. While they sound similar, they are entirely different. The face value of a life insurance policy is basically the amount of money that will be paid to the beneficiaries once the policyholder passes on. It is simply the overall worth of a life insurance policy.
On the other hand, cash value is more like a savings component on a life insurance policy that accumulates over time. It is an account that the policyholder can always run to if in need of money for an urgent need. You can borrow against the cash value of your policy if you have a financial need you need to take care of. However, it is noteworthy that using your cash value to sort out significant expenses may have an effect on the death benefit that would be paid to your beneficiaries, except if you repay it back.
How Much Life Insurance Face Value Should I Have?
One of the major reasons why most people purchase life insurance is to look out for the financial future of their loved ones, particularly those that depend on your income for survival. If you have a huge financial obligation to your family, then the face value of your life insurance should match their financial needs.
Always consider the financial needs of your loved ones when determining how much life insurance face amount you need. The logic is to purchase a coverage amount that is far greater than the income you earn in a year.
Furthermore, with the help of a life insurance calculator, policyholders can now get an estimate on the amount of coverage they should buy for their needs and unique financial situation. You can also reach out to an insurance agent or a financial advisor on how to choose the right life insurance face value for your needs.
How Do I Calculate The Face Value Of My Life Insurance Policy?
One of the ways that you can calculate the face value of your life insurance policy is through a life insurance calculator. Start by evaluating your financial obligations, such as loans and mortgages, as well as future responsibilities like children’s education and retirement costs. After that, figure out how much money your dependents would require to maintain their quality of living. You can get an estimate by multiplying your yearly income by five to ten.
This would help you to determine the overall face amount of your policy, and if there are adjustments that need to be made, you can discuss it with your insurance company. To be on a safer safe, we strongly advise you to speak with an insurance agent in order to have proper guidance on how to go about it.
