What Is the Difference Between Cash Value and Face Value in Life Insurance?

What Is the Difference Between Cash Value and Face Value in Life Insurance?
Whole life insurance policy

If you have a whole life insurance policy, there are two common terms that you must be familiar with: cash value and face value. While these two terms sound familiar, they mean different things that determine how your policy operates.

A whole life insurance policy is designed to provide you with permanent coverage that lasts the entire span of your lifetime. Therefore, if you don’t know the terminologies used by the insurance agents, you could find yourself misinformed and confused about what the coverage means for you and your designated beneficiary.

Cash value and face value are two terms used to refer to the benefits that your whole life insurance policy offers. Keep in mind that these benefits are not only different to you (policyholder) but also to your beneficiaries.

So, let us dive in and see how cash value differs from the face value of your whole life insurance policy.

What Is the Cash Value of a Whole Life Insurance Policy?

Typically, when you purchase a whole life insurance policy, a portion of your monthly premium goes into the cost of paying the actual cost of the policy while the remainder is channeled into a cash fund account that accumulates tax-deferred interest throughout the policy’s term.

The cash value is sometimes referred to as the “account” and represents the total amount of money accumulated on the policy throughout its lifespan.  Think of it as money stashed in a savings account.

Whole life insurance policy

Depending on your policy terms, you can utilize the policy’s cash value for other purposes while you are still alive (living benefits). You can decide to “cash-out” on the policy to receive a significant portion of the cash value or borrow a loan against it. Cashing out will automatically terminate your policy. You can also borrow money from the cash value of your policy with low interest at any time.

Another common term that comes up when talking about the cash value is the “surrender value.” It refers to the total amount of money you will receive if you try to access your policy’s cash value.

Since most life insurance companies don’t want you to terminate your policy, there are fees and other charges associated with early termination. The surrender value will be the remainder of the cash value after all deductions.

What Is the Face Value of a Whole Life Insurance Policy?

The face value simply refers to the amount of money your designated beneficiary will receive when you finally die. You can think of it as the death benefit of your policy.

Ensure you are aware of your policy’s face value at the time of purchase. The primary goal should be to purchase a policy with a face value that will be sufficient to cover funeral expenses and also provide for your loved ones once you are gone.

In most cases, the face value/death benefits won’t change throughout the policy’s term. The money is also not subject to income taxation. Therefore, your beneficiary can count on receiving the full amount without incurring a tax liability.

The face value plays a critical role in determining the policy’s cost. Typically, the higher the face value, the higher the monthly premiums will be, and vice versa. Some insurance companies will allow you to supplement the face value with riders (additional benefits) to increase the payout amount.

For instance, a disability income rider will provide the insured with a source of additional income if he/she becomes disabled and can no longer work to earn a living.

What Happens When You Die?

 

When the unexpected happens, and you are no more, your beneficiary will be expected to file a claim with your insurance company. The amount of money he/she receives will be the face value of the policy. They cannot access the funds accumulated in the cash account. In simple terms, your beneficiary cannot receive the cash value of the policy.

For instance, if the face value of your whole life insurance policy is $250,000 and the cash value has accumulated to $25,000 at the time of your death, the beneficiary will only receive $250,000 while the $25,000 remains with the insurance company.

How Does Borrowing from the Cash Value Account Affect the Face Value of Your Policy?

 

If you decide to borrow money from your life insurance policy, your coverage won’t be terminated unless you choose to do it yourself. However, taking a loan against your life insurance policy will significantly reduce the death benefit.

For instance, if your policy’s face value is $200,000, and you take out a loan against it worth $20,000, your insurance provider will subtract the outstanding loan amount from the face value. Should you die before clearing the loan, your beneficiary will receive $180,000 instead of the full $200,000 face value. Any unpaid interest may also be deducted from the face value.

Fortunately, you can avoid having your insurance policy’s face value reduced by repaying the loan borrowed against it on time. As long as you honor your agreement with the lender and pay back the full amount plus accrued interest on time, your beneficiary will receive your policy’s full face value amount when you die.

Contact Insurance Master for More Information on Life Insurance Policies

 

At Insurance Master, we pride ourselves in helping our clients find quality life insurance policies that offer maximum benefits at relatively affordable rates.  Our team of licensed insurance agents is always ready to listen to your insurance needs and advise you accordingly.

Contact us today and let us help you find an insurance policy that suits your unique needs and within your budget.  We are always ready to serve you.

 

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