The Difference Between Cash Value and Face Value of Life Insurance

face value of life insurance

There are a lot of options when it comes to life insurance. When you first purchased your policy one of those options was the face value. Face value of life insurance is the death benefit. This is the amount a beneficiary would receive if you were to pass away. 

Then you have other life insurance terms that sound similar. Such as cash value, account value, and surrender value. It’s easy to get confused when talking about the numbers if you don’t know the difference. We’re going to discuss the differences in these terms. But your actual numbers will be determined based on your specific policy and insurance company.

Permanent life insurance policies accumulate cash value as you pay your premiums. These are whole and universal life insurance policies. The cash value and face value of life insurance are not the same. Notably, the cash value of your policy increases the longer you have the policy.  

You may think the face value of life insurance stays the same. Interestingly this is not always the case.  


Situations Where The Face Value of Life Insurance Changes 

Life insurance companies give you the option to customize your policy with riders. These are add-ons that give you flexibility with what you can do with your policy. Some of these riders give you a living benefit, meaning you can use your policy while you’re still alive. 

As a result, you’re using your death benefit, lowering the face value of life insurance. These living benefit riders can allow you to use the funds for medical costs or long term care. If you do decide to use your living benefit riders, your beneficiaries will get a lower death benefit because you have already used a portion of it. 

Some policies allow you to take a loan out. However, you’re borrowing money from the face value of life insurance. If you don’t pay this loan back it will be subtracted from your death benefit (face value). 


How Cash Value Is Determined 

The face value of life insurance will play a big role in determining the premiums that you pay for your life insurance policy. However, determining the cash value of your policy is a little more complicated. To be clear, when talking about cash value we are only referring to permanent life insurance policies. Since these are the types that accumulate cash value.  

Cash value is the same as the account value. The money you pay in premiums is divided up into three places: the accumulated cash value, the death benefit (face value), and the insurance company. 

The surrender value of a whole life insurance policy is the cash value minus the fees you must pay when surrendering your policy early. There are two types of surrender values if you have a universal life insurance policy.  


Guaranteed Surrender Value

You can receive the guaranteed surrender value after three years of having the policy. Cash value is about 30% of the money you’ve paid in premiums after the first year of owning the policy. This amount goes up to 50% between 4 and 7 years. After 7 the amount is calculated based on the insurance company’s policies and your specific circumstances. So, the longer you’ve had the policy and the more money you have paid in premiums the larger your guaranteed surrender value is. 


Non-Guaranteed Surrender Value

A non-guaranteed policy has an investment component attached to it. Your insurance company will invest a portion of your premium payments in various assets. The surrender value is then determined based on the market interest rates. For example, they can build a bond portfolio and your surrender value would be determined by how well it is doing.  


Calculating The Surrender Value Of a Whole Life Insurance Policy

face value of life insurance

Let’s look at calculating the guaranteed surrender value. Each insurance company has fees attached to the option of surrendering your policy. So after adding up the cash you receive from paying premiums for the policy, you need to subtract those fees. The surrender value of a life insurance policy is very low when comparing it to the face value of life insurance. 

So, the surrender value is not the same as the cash value, due to the penalty of surrendering your policy early. The surrender value takes into account those fees

For example, let’s say you have been paying premiums for 5 years on a policy with $300,000 as the face value of life insurance. Your policy has accumulated $10,000 cash value from your premiums. Your insurance company has surrender fees at 5 years that are 5%. 

5% of 10,000 is 500. 

Cash value – early surrender fees = surrender value

10,000 – 500 = 9,500

You have a surrender value of $9,500. 

The earlier you surrender your policy, the higher your surrender fees will be. After ten years, the surrender fee could be zero.   

Taxes on Cash Value and Face Value of Life Insurance 

When taking money from the accumulated cash value of your insurance policy, any interest earned you’ll likely need to pay ordinary income tax on. 

When you take a loan from the face value of life insurance or decide to use a living benefit rider, the money you withdraw may be tax-free. 

Cashing Out A Life Insurance Policy With A Life Settlement

Before you decide to surrender your life insurance policy, consider a life settlement. If you’re over 70 years old or living with significant health impairments you could receive a much higher payout than if you were to surrender your policy with your life insurance company. 

A life settlement is when you sell your policy to a buyer who takes over your premiums. Then they receive the death benefit when you die. The amount you can receive from a life settlement is less than the death benefit but significantly more than the surrender value. 

You can get an idea of whether your policy would qualify for a life settlement using a life settlement calculator. Many people use life settlements to fund cancer treatments and retirement. Your life insurance policy is an asset, make sure you get the most out of it. 

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