Michael Hanson / Getty Images The face amount that someone applying for insurance can qualify for depends on several factors, including how much coverage they need, how much they can afford, and how much life insurance the company will extend to them (which could be limited by their age, health, or the amount of their existing life insurance coverage). In some circumstances, the face value amount and death benefit can differ; insurers frequently let you reduce the face value of your policy after it was issued, and in some cases, you can increase it.
Alternate name: Face amount
How the Face Value of a Life Insurance Policy Works
The face value can be thought of as the starting point for the death benefit—it establishes the death benefit at policy issue and, therefore, the premium. But both the death benefit and face value can sometimes change during the policy’s term.
When the Face Value (and Death Benefit) Changes
Here are some examples of when the face value, and death benefit, might change:
Reduction upon request: Insurers will frequently reduce the face value upon request, since this doesn’t increase their liability or exposure to risk. However, increasing the face value often requires that you reapply for the additional amount of coverage. Decreasing term life insurance: This is a type of term life insurance in which the face value (and death benefit) decrease at regular intervals, such as every year, until the policy’s term expires. However, policy premiums remain level throughout the term. For example, a 30-year decreasing term policy could cover the declining principal amount of a 30-year mortgage. Guaranteed insurability rider: This rider can be added to a policy at the time of purchase. It allows the insured person to increase the face value, or death benefit, at regular intervals, such as every five years until a certain age, or upon qualifying life events, such as the birth of a child. The key is that they can increase the benefit without providing evidence of insurability—they don’t have to apply or answer medical questions. Renewable term life insurance: Many term life insurance policies are renewable once the term expires. The insured doesn’t have to provide additional evidence of insurability, but the new premium is based on their current age (and the health they were in when they took out the original policy). Since the cost of insurance increases with age, some people choose to renew for a lower face amount, which comes with a more affordable premium. Variable life insurance: With variable life policies, you can invest the cash value into subaccounts similar to mutual funds. Depending on investment results, the policy’s face value and death benefit may increase or decrease. Accelerated death benefit: Accelerated death benefit riders allow the insured person to access the face value of the policy while they’re still living. These riders are generally used to pay for expenses such as the costs of managed home care, long-term care, nursing home care, chronic or critical illness, or disability. But activating these riders reduces the policy’s face amount proportionately.
When the Death Benefit Changes but the Face Value Does Not
Though the face amount and death benefit often move in tandem, like in the examples above, there are less common instances when they can differ. This happens primarily with permanent life insurance policies:
Policy loans: If the policyholder takes out a loan against the cash value and does not pay it back, the death benefit will be reduced upon the death of the insured person, even though the face value won’t have changed. Paid-up life insurance: Participating whole life insurance policies may pay dividends to policyholders in the form of paid-up additional life insurance, which increases the death benefit but does not change the face value of the original policy. Universal life insurance option 2: With a universal life insurance policy, you can select one of two death benefit options. In the first, the death benefit equals the face value of the policy. The second provides a death benefit equal to the face value plus the accumulated cash value, and so the death benefit can be greater than the face value.
Face Value vs. Cash Value
Though the face value is often the same amount as the death benefit, it should never be confused with a policy’s cash value. This distinction is only necessary with permanent life policies, which accumulate a cash value—term policies do not.
