In life insurance there are two concepts that can be a bit complex, but it is necessary to know how to differentiate. These are the concepts of cash value and face value, which make up whole life insurance .
The whole life policies and universal life insurance policies are considered a permanent life insurance, since they provide coverage for the entire life of the insured.
Both the cash value and the face value are different in terms of how their amounts are determined. However, both the cash value and the face value may increase or decrease the amount to be paid to the beneficiary after the death of the insured.
Definition of face value and cash value
The face value is the amount that the beneficiary of the policy or life insurance receives when the insured dies. It is a fixed amount known from the beginning of the life insurance contract that does not depend on the years that the event takes to occur.
The cash value is the amount that is paid to you for the life insurance policy in the event that the insurance ends or is cancelled before the event for which it was contracted takes place.
By their nature, the concepts of face value and cash value can only be differentiated in permanent life insurance, either whole life or universal life, since term life insurance does not have a cash value. In term life insurance, when the expiration period arrives when it is renewed for a longer term or another life insurance is contracted in a different insurer, the insured is not entitled to a cash value.
Cash value benefits
One of the advantages of the cash value is that there is no deferred tax on it; that is, there are no tax consequences until the funds are withdrawn. This means that if the insured decides to access the funds through a policy loan, the money will be received tax-free and does not have to be repaid.
Another advantage is for the beneficiaries of the policy, who can obtain a higher sum upon the death of the insured if the policy has additional options associated with it
However, it must be taken into account that, although the policy loan does not have to be repaid, if it is exceptional at the time of death, the nominal value of what the beneficiaries will charge could be reduced to that amount .
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Differences in collecting the cash value in universal life and whole life insurance
In whole life policies, the cash value plus the face value is paid after the death of the insured.
However, beneficiaries of universal life insurance can get paid in two different ways:
- Option A. Cash value is not paid, but is used to pay the final death benefit. The more money in the cash value account, the less money the insurer will have to pay to life insurance beneficiaries upon the death of the insured. For example, if an insured has a universal life insurance of 70,000 $, with 30,000 available in the cash value account, the beneficiaries would receive 70,000 euros after their death, of which 30,000 will be in the cash value account and 40,000 the insurer would be paid.
- Option B. As with whole life policies, option B pays the cash value plus the face value after the death of the insured. In this case, with a life insurance of 70,000$ with 30,000$ in cash value, the insured can choose to have the cash value added to the face value, which would represent a benefit after the death of the insured of 100,000 $.
Most people usually choose option A because, although this option brings lower benefits to insurance beneficiaries than option B, the premiums that must be paid are also lower.