All life insurance policies have a face amount, which is also called the death benefit, this is the amount that’s paid to your beneficiaries after you die. But only permanent life insurance policies have cash value, which functions similar to a savings or investment account that you can use while you’re still alive.
Features of face amount vs. cash value
|Face amount||Cash value|
|What it covers||A death benefit amount paid to beneficiaries once the policyholder dies.||An investment component that grows over time and can be used for anything, such as a retirement supplement|
|Who it’s for||Your beneficiaries||You|
|Payout options||Single lump sum payment||You can withdraw any amount of the cash value at any time. If the entire cash value is taken out, the policy will cancel|
What is the face amount?
The face amount of a life insurance policy — also referred to as the death benefit — is the amount of money that is paid to your beneficiaries after you die.
How does the face amount work?
After you die, your beneficiaries receive the face amount of your policy in a single lump sum payment. If you purchase a $250,000 life insurance policy, they’ll receive $250,000. If you have more than one beneficiary, they receive the percentage of the face amount that you designate to them when you apply for the policy.
What is cash value?
Cash value is the savings or investment component of a permanent life insurance policy. The cash value grows over time and can be used while you’re still alive. If you don’t use your policy’s cash value, it’s not added onto your policy’s face amount. You can use your cash value for anything, such as supplementing your retirement, paying off debt or buying a car.
How does cash value work?
Each time you pay your premium, a large portion of it goes into your policy’s cash value component. What happens next depends on which type of permanent life insurance you have, since whole life policies, universal policies and variable policies all invest your cash value differently. Your cash value grows over time, and can be withdrawn at any time while you’re still alive.
Any cash value amount that you take out doesn’t have to be repaid to your policy, since it’s your money. However, the amount that you withdraw is deducted from your policy’s face amount unless you pay it back, this means your beneficiaries will receive less money after you die. And if you withdraw the entire cash value amount, your policy will be canceled and your beneficiaries won’t receive a death benefit.
How do the face amount and cash value affect each other?
You’ll be able to withdraw your cash value once it starts growing, which normally takes a few years after your policy starts. The cash value amount you withdraw is the amount that is deducted from your policy’s face amount. If you repay the amount that you withdrew, the face amount is restored to its original amount.
Withdrawing the entire cash value amount is an option if you no longer need the life insurance aspect of your policy, and don’t want to continue paying premiums. For example, if your children are now independent or you have enough savings to cover end-of-life expenses, you may not need the life insurance portion of your policy anymore. Pulling out all your cash value surrenders your policy but gives you access to cash to use however you wish.
How to choose between the face amount and cash value?
|Life insurance term||What it does|
|Face amount||The death benefit that’s on all life insurance policies, paid to your beneficiaries. A higher face amount will result in higher cash value growth.|
|Cash value||Only on permanent policies but provides an extra source of cash later in life.|
Compare life insurance policies
The face amount of your life insurance policy is also known as the death benefit and is paid out to your beneficiaries. Cash value only applies to permanent life insurance policies and is similar to an investment account. If you withdraw your cash value for your own use during your life, your face amount will be reduced by the amount that you take out.
If you’d like to find out more about life insurance, compare life insurance companies to see if a permanent life insurance policy is right for you.
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