How do I determine the face value of a life insurance policy?


A permanent life insurance policy has a face value, also known as a death benefit. This is the dollar amount that the policy owner’s beneficiaries will receive upon the death of the insured. The cost of an insurance policy is directly proportional to the face value: the higher the premiums paid, the more death benefit it will buy.

The initial face value of an insurance policy will be stated on the policy itself. Any planned future changes will appear in the policy’s illustration table. The death benefit can also change if you buy additional insurance (called paid-up additional insurance or PUA) or decrease if you buy cash value.

Key points to remember

  • The face value of a life insurance policy is the death benefit.
  • Face value is the primary factor in determining the monthly premiums that will be due.
  • The face value can be found in the statement of benefits.
  • Permanent life insurance can also have a cash surrender value less than face value, which is the amount that would be paid out if the policyholder elected to surrender the policy early.
  • The death benefit may change over time as additional insurance is purchased or as the cash value inside the policy increases or decreases.

The face value of life insurance

Life insurance policies aim to provide financial resources to those affected by the death of another person. For example, the death of a parent can lead to a loss of income, making it harder to save for college or pay off a mortgage on the family home. The death benefit received from life insurance can help replace this lost economic value in the event of premature death.

The death benefit can also be used to establish a trust, give to charity or leave an inheritance even at old age.

The initial amount of insurance taken out is known as the face value of the policy. In the event of the death of the insured, this is the basic amount that will be paid to the beneficiaries of the contract. However, the total death benefit may change over time. Paid-up additional insurance increases the death benefit, for example when dividends are paid into the policy. Cash withdrawals from the policy, on the other hand, will reduce the death benefit, perhaps below face value.

How to determine face value

To calculate the full benefit that will be paid to the beneficiaries in the event of the death of the insured, consult the table of benefits in the contract. Most life insurance companies also offer endorsements, which are additional benefits that can be included in a plan. For example, some endorsements state that the face value doubles if the insured dies as a result of a specific type of accident.

In total, the face value plus the value of any additional benefits constitute the total death benefit of the policy.

How Face Value Influences Cost

The 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 cheaper upfront) only have a face value.

For example, a person looking to purchase a term life insurance policy from XYZ Company would expect to pay more for a policy with a face value of $500,000 than for a policy with a face value of $500,000. $100,000.

As an example, the table below shows the hypothetical premiums used to purchase different amounts of 20-year term life insurance for a healthy, non-smoking 30-year-old male.

Nominal value Monthly premium
$100,000 $10
$250,000 $15
$500,000 $25
$750,000 $34
$1,000,000 $42
$2,000,000 $77

The cash value is the amount you would receive if you surrendered the policy early, forfeiting the death benefit in exchange for an initial cash payment. This is recorded on the monthly statements that insurers send to their customers. Cash value can also be referred to as net cash value.

What can cause the face value to change?

Many events can trigger an increase or decrease in the face value of a policy.

On the positive side, the cash value can grow enough to cause a corresponding increase in the face value of the policy. This can result from dividends being credited to the policy, which increases the total cash value. Policy owners may also be able to purchase additional insurance (PUA) under the same policy by adding money to it, increasing the death benefit.

On the negative side, unpaid policy loans taken from the policy balance by the policyholder will be deducted from the face value of the policy. If you don’t pay your premiums, the insurance company will start using the policy’s cash value to cover those payments, reducing the cash value and death benefit as well. Finally, if you make cash withdrawals (called surrenders) from the policy, this will reduce the death benefit. Note that you can reduce the death benefit to well below the original face value if the cash amount is too depleted.

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

How do you determine the correct face value you need for life insurance?

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

The main thing is to determine the face value to buy. To calculate it, start 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, determine the maximum length of coverage needed. For example, if your youngest child is now two years old, you would want to make sure they have enough income while they go to college. It’s another 20 years.

It may be more cost effective to use several policies with different face amounts and different guarantee periods to cover these various needs. Or it may be easier to have one big insurance policy to cover everything.

Is the face amount the same as the death benefit?

The face amount is the initial death benefit of a life insurance policy. But, as the cash value of the policy changes over time, it can change the total death benefit above or below face value.

Can I withdraw my cash value from life insurance?

Yes, but it will reduce the death benefit accordingly. If you withdraw (redeem) all the money from a policy, the policy will end.

The essential

The face value of a life insurance policy is the initial death benefit it will pay out if the insured person dies. For a term policy, this will remain the same throughout its lifetime. For a permanent policy, the actual death benefit may increase or decrease as the cash value of the policy changes.


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