The face value of your life insurance policy is the dollar amount your policy is worth, or how much coverage you have.
In other words, the face value is typically the amount of money your beneficiaries can claim if you die while your policy is active.
What is the face amount of life insurance?
The face amount of life insurance is how much your policy is worth. It’s how much money is paid out when the policyholder dies. This is also called the death benefit.
The term “face amount” can be used interchangeably with “face value” and “coverage amount.”
The exact face value of your life insurance policy will depend on how much coverage you bought. If you bought $1 million in life insurance coverage, your policy’s face value is $1 million.
How to determine your face value
Your policy’s face value should be high enough to cover all of your financial obligations. A common rule of thumb is to multiply your income by 10 to 15, but the exact amount of life insurance you need depends on your overall financial situation.
To determine the right face value of your policy, account for covering the following expenses:
Outstanding debts
The cost of raising your dependents
Everyday bills and expenses
Final medical bills
Check out our life insurance coverage calculator to get an idea of what face amount is best suited for your particular needs.
Can you apply for any face value?
You must apply for a face amount that’s proportional to your financial responsibilities. Insurers evaluate your evidence of insurability before they grant you coverage. This means they’ll confirm you’re eligible for the face amount of coverage you’re asking for based on your age, income, and assets.
Your income and age determine how much coverage you can get, though other factors (like the number of dependents you have) can justify some requests for a face value that isn’t proportionate to your net worth.
For example, if you’re 30 years old, insurers will often allow you to apply for up to 30 times your annual income, or even higher. This is because you have high earning potential over the course of the rest of your career.
But let’s say you’re 60, and your mortgage is paid off. Insurers may only approve you for 10 times your annual income, because you have fewer working years left and less debt.
Read more about how much life insurance you can buy
Face value vs. cash value: What’s the difference?
The face value of a policy differs from the cash value, which is an investment-like component included in permanent life insurance policies, like whole life insurance.
Your cash value account is meant to be accessed while you’re still alive.
Every time you pay a premium, a portion goes toward the cash value. The funds in the account accumulate over time.
You can use your cash value to withdraw funds, take out a loan, or in some cases, pay your premiums.
The cash value is generally worth less than the full face value of your policy.
Cash value doesn’t increase a permanent life insurance policy’s face value because it’s not added to the policy’s death benefit.
If you die without using the cash value, the insurance company keeps those funds. Your beneficiaries only receive the death benefit after you die.
Learn more about how to understand your life insurance policy
How can you change your face value?
Most often the face value and the death benefit are the same amount of money, and both values stay the same for the duration of the policy. However, your face value can change depending on the riders you use, any loans you take out (if you have a permanent policy that offers cash value), and any misrepresentations on your original application.
Using certain riders
Some riders pay out a portion of the death benefit while you’re still alive, under certain circumstances.
The accelerated death benefit rider, for example, pays out the death benefit if you’re diagnosed with a terminal illness.
An accidental death and dismemberment rider (AD&D) will pay out if you lose a limb in an accident.
If you added one of these riders on your policy and you qualify to file a claim, the money you get will be detracted from the death benefit. This will change the face value of your policy.
For instance, if you have a policy with a $500,000 coverage amount and you qualify for $100,000 of accelerated benefits, your beneficiaries will receive $400,000 when you die.
Taking out a loan against the policy’s cash value
If you have a permanent life insurance policy with a cash value, how you use that cash value can impact the face value of your coverage.
If you take out a loan against your cash value and don’t pay it back before you die, your face value will decrease.
Any money you owe will be taken from the death benefit to repay your insurer, and whatever is left will be paid out to your beneficiaries.
For example, let’s say you have a policy with a face value worth $500,000, and a cash value worth $100,000. You decide to take out a $50,000 loan against your cash value. If you die before paying back the $50,000, your family can only claim $450,000 instead of the full $500,000. And the remaining cash value stays with the insurer.
Because taking out a loan against your policy’s cash value can risk your family’s long-term financial security, using your life insurance policy for a loan should be a last resort in most cases.
Lying on your life insurance application
Intentionally lying on your application is considered insurance fraud. If your insurer finds out you misrepresented yourself, it can reduce the face amount of your policy, or void your policy entirely.
The bottom line
The face value of your policy is important because it’s likely why you’re buying life insurance coverage in the first place — to provide financial support to your loved ones in case you’re no longer around to do so.
Getting a policy with the right face amount and ensuring your beneficiaries receive the full value of your policy protects their long-term financial health. If you’re not sure where to start, you can contact a Policygenius expert for free. Our agents are licensed in 50 states and can walk you through the entire life insurance buying process while offering transparent, unbiased advice.
