Life Insurance Face Amount versus Cash Value What’s the Difference?

Life insurance can use several industry-specific terms that confuse laypeople.  This can cause confusion about what specific features of a life insurance policy do.  For example, what is the difference between a life insurance policy's face amount and cash value?  The really simple answer is that the face amount of a policy is simply its death benefit.  The cash value, on the other hand, is the policy's accumulated cash value or cash surrender value that the policy owner can use for whatever purpose he/she desires either while the policy remains in force or after canceling the policy.

Is the Cash Value Always Different than the Face Amount?

For the majority of a life insurance policy's existence, the cash value will be some value different from the face amount.  Even more precisely, the cash value is always a number less than the face amount.

That being said, the cash value is on an eventual path to equal the face amount of the life insurance policy.

What Happens when the Cash Value Equals the Face Amount?

Cash value equals the face amount of the life insurance policy at the policy's maturity date–the technical insurance term for this is the endowment age of the insured.

When this happens most policy's “endow” and the policy owner receives the cash benefit.  This event also cancels the life insurance policy.

Endowment is a taxable event.  For this reason, many life insurers developed new rules for life insurance contracts that extend the endowment date of the policy indefinitely.  Doing this keeps the policy in force, keeps the cash value inside the life insurance policy, and ensures that eventually, the policy pays a death benefit upon the insured's death.

When the Insured Dies, what Happens to the Cash Value in the Policy?

For most cash value life insurance policies, the insurance company keeps the cash value accumulated in a policy and pays the beneficiary the death benefit of the policy.

One exception to this statement is universal life insurance policies that use an increasing death benefit increased by the cash value in the policy.  The common name for this is Death Benefit Option B (note: it's not universally the case, some universal life policies also have an option to increase the death benefit by premiums paid and this might be the company's option B).  In the case of such a universal life policy, the insurance company pays both the initial death benefit and the cash value accumulated in the policy.

Does Growing Cash Value Reduce the Face Amount of the Policy?

Technically speaking no, increasing cash value does not reduce the face amount of the policy.  Again, because the insurance company keeps the cash value and pays the face amount to the beneficiary, any cash value accumulation does not affect the amount payable to the beneficiary.

However, increases in cash value can affect the Net Amount at Risk, which is an important consideration for managing a cash accumulation focused universal life insurance policy.

Also, increases in cash value can force a higher death benefit to remain compliant with 7702 Life Insurance Testing.

How Does the Face Amount of a Life Insurance Policy Benefit the Insured?

There are three major benefits the face amount of a life insurance policy provides the insured.

First is the peace of mind the insured gains knowing that he/she has protected his/her loved ones or financial interests by having the death benefit in place.  This can eliminate a lot of stress and anxiety that people can face when they lack adequate life insurance coverage.

Second is covering the obligations the insured may have to a bank or business partner for several possible business dealings that may require life insurance coverage.  Common examples are Small Business Association loans and partnership agreements that compel each business partner heirs to sell their financial interest in the company to the remaining business partner(s).

Lastly, we have living benefits offered by many life insurance products today.  These benefits provide access to a portion of the policy's face amount if the insured faces a serious medical circumstance.  This can include terminal illness, lack of independent living, and/or certain major health events like heart attacks, strokes, and some cancers.

How Does the Cash Value of a Life Insurance Policy Benefit the Insured?

The insured/policy owner of a policy can benefit from the cash value accumulation in a life insurance policy in many ways.  The cash accumulation determines the value the policy-owner receives when opting to use a nonforfeiture benefit of a policy.

The cash value can also provide the policy-owner with retirement income or capital to use the life insurance policy for various self-banking strategies outlined by various insurance marketers.


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