When you decide to have a permanent type of life insurance, you should know the difference between life insurance face value vs cash value. These are the two most common terms in the business, giving you (or your family) the benefits of the saving in its own mechanism or method. Each one has its own features and benefits, and there are also possibilities of downsides along the way. So, what does each term refer to?
Understanding More about Permanent Life Insurance
The permanent life insurance includes universal life insurance and whole life insurance. Both of them have life insurance face value vs cash value in which both are different in nature.
Permanent life policy would provide permanent coverage, offering protection for your entire lifespan rather than for a certain period of time. Permanent life insurance coverage would be different from term life insurance. As it was mentioned before, the permanent life insurance is divided into two types: universal life and whole life, where both are offered life insurance face value vs cash value.
These features are different from one another. Not only they are different in nature, but they are also different in mechanism and implementation, and they are also different for your beneficiaries.
- Life Insurance Face Value
It’s safe to say that the face value would be the death benefit. It is the amount of dollar in which your policy is worth. When the policy expires, your beneficiary would get this exact amount of money. You should be able to find the number within the policy’s benefits schedule.
- Life Insurance Cash Value
Also known as cash surrender value, the cash value is the amount of money that you will get when you terminate the insurance early. It means that you give up the policy’s death benefit for the exchange for money upfront. These would be shown in the monthly statement, usually sent to the customers by the insurer.
How the Policy Works?
To get a better understanding of life insurance face value vs cash value, you need to understand how the policy works. When you have a permanent life insurance, you have to pay premiums. There is a certain percentage of the premium that would be kept for the insurance cost, while the remaining would be kept in the cash fund. The one kept in the cash funds get non-taxable interest. The accumulated number of money (in the cash funds) would be known as the cash value of the policy. You should know that only permanent policies have cash value – term policy doesn’t.
What about the money that is kept for the insurance? That’s the face value. That’s the amount of money given to the beneficiaries when the policy holders pass away. That’s why the face value (of life insurance policy) is also called the death benefit.
When you pass away, your beneficiary is able to file a claim with your insurance provider. The money he/she will get is the face value as they won’t have access to the cash account. Your beneficiary WON’T get the cash value of the policy. Let’s say that your whole life insurance policy has $200,000 as the face value and there is cash value worth of $25,000 when you die, it means that your beneficiary will only get the $200,000. The insurance company would be the one collecting the $25,000 cash value.
Cash Value Advantages
Your beneficiary may not have access to your policy’s cash value, but you as the policy holder can actually enjoy the benefits. The accumulated amount of money within the cash value account is tax deferred. It means that it isn’t subject of the tax. It won’t be taxed. In the event you want to take a loan against your policy, the money would be taken from that cash value account. This fund would be known as the living benefit. It isn’t taxable and it doesn’t have to be repaid. You are free to take a loan against your insurance policy for any reason and at any time that you want.
This is the basic principle of life insurance face value vs cash value. Can you see the difference now? You should also have the option to get money (from the cash value account) by cashing it in or surrendering the policy. But if you opt for this, your policy would be terminated, which means that your beneficiary won’t get the death benefits of your policy. Moreover, your provider would subtract the charges applying to the cash value. Let’s say that your life insurance’s cash value is $15,000 and your carrier charges around 3% of surrender fee, they would reduce $450 from the account, leaving you ‘only’ $14,550. However, the cash value of the policy in time would match the surrender fee’s value, which will actually null any fee required from you to pay (for surrendering your policy).
Can Cash Value Affect Face Value of a Policy?
Now that you already get the basic facts of life insurance face value vs cash value, we can move forward. The next question would be: If you take the cash value, will it affect your face value? In the event you want to borrow money from your policy, you should know that the coverage won’t be terminated. Well, unless it’s you yourself who decides to terminate your policy.
Second, you should also know that taking a loan against the policy would affect the death benefits. It would be reduced. Let’s say that your life insurance face value is $100,000. You borrowed $5,000 against the policy. Your insurance provider will naturally subtract that $5,000 from the policy’s face value, which means that your beneficiary will ‘only’ get $95,000. Moreover, if there is any unpaid interest, it would also be deducted from the face value.
If you want to prevent such thing from happening, you can repay the money you have borrowed right on time. As long as you can pay the full amount back, including the relatively low interest, your beneficiary would get the full amount of your policy’s face value when you are gone.
Paying premiums for life insurance would still be subjected to taxes because they aren’t tax free. Paying premiums is considered a regular expense, just like buying a new car or a new watch – it’s still subject to taxes. However, when the beneficiary gets the death benefit, he/she doesn’t have to deal with taxation because death benefit isn’t taxed. If you have any concern or questions about how taxation works in relation to your insurance, you should consult a professional financial expert or insurance agent to know more about this.
What about the matter of tax in relation to life insurance face value vs cash value? When you withdraw money from your policy’s cash value, any earned interest would be subject to the regular (and ordinary) income taxes. If you take a loan from the face value (or utilize the living benefit), the withdrawn income may likely tax free. Again, if you have doubts about it, discuss it with the professional expert.
Choosing the Ideal Face Value of Life Insurance
Permanent life insurance policy is supposed to help your family deal with difficult times after your passing. But when you choose the policy, you should also feel comfortable with it. You shouldn’t struggle hard to afford it, and paying the premiums shouldn’t give you a lot of stress and hardship.
After learning the basic things about life insurance face value vs cash value, you should consider several things related to the right insurance policy that is just perfect for your needs. Here are several elements to ponder about:
- The coverage needs. If you want to know how much insurance you will need, you should consider your current expenses, covering credit card payments, bills, child care, rent, groceries, mortgage, and schooling. Then, think about the expenses that you have to make in the future, such as aging parents’ care or college tuition. It would be ideal to take a policy that is similar to the numbers that you have. Another alternative is to think about your salary, and then multiply it by at least 10 or 15 for maximum result. Let’s say that you get $50,000 per year, then you should choose insurance policy having $500,000 or even $750,000 as the face value.
- The budget. Naturally, the higher the policy’s face value, the higher the premiums will be. When you have determined on how much coverage your family needs, you can start comparing insurance quotes so you can get the best price. If you work with an independent insurance agent, the person should be able to help you crunch with numbers and find the one matching your budget.
- The amount of (life) insurance you are considered eligible for. Some types of (life) insurance are set at small amounts. For example, the final expense (life insurance) policies range between $2,000 and $25,000 because they are only designed to cover burial, funeral, and end of life costs – and not much else more.
In certain situations, you will have to be considered eligible or qualified for certain coverage level:
You sign up for a big life policy. You may decide to buy a million dollar policy and even more. But don’t be too surprised if your insurer ask you to show proof of your net worth or income. It is done to justify your requirements of big policy along with your abilities to pay the premiums.
You have poor health. If you sign up for life insurance, you may have limited (coverage) options, even when you buy the insurance policy with pre-existing medical condition.
Face Value: Will It Change?
In general, the policy’s face value doesn’t change. When you have decided on the value or the dollar worth of the policy, it will stay the same until you die or until the policy expires. However, there are some possible situations that can change the face value, causing it to go up and down.
- If you take out a loan against the policy, it may change the face value, unless you pay up the loan on time
- If you activate accelerated death benefit rider, it may reduce the face value.
- If you choose the guaranteed insurability rider, which enables you to add coverage to the policy later on, increasing the face value. You can add it without going through health question checking or medical exam
- If you want to increase the coverage
- If you want to reduce the face value
- If you have universal life insurance policy
- If you have a decreasing term life policy
Life insurance is a serious matter. It shouldn’t be taken for granted. If you don’t really know what to expect, you should work with a professional expert who can provide you with information and guidance. The professional should also be able to help you with life insurance face value vs cash value and guide you out.