Basically, there are two major types of life insurance policies: Term Life and Permanent Life. Only the permanent life insurance policies have a cash value component. Permanent life insurance has 3 types: Universal Life, Whole Life, and Variable Life insurance policies.
Cash value vs face value of life insurance: Why do you need to understand the difference between face value and cash value? Being the buyer of life insurance; it makes perfect sense to free yourself from petty confusions regarding life insurance policies.
Though apparently similar; both face value and cash value are totally different from each other. Let’s begin the blog to understand both completely in minimum words, possible!
- What does face value mean on a life insurance policy?
- What is the face value of any life insurance policy?
- What is the cash value of any life insurance policy?
- How does money go to a cash value account?
- How is cash value money better than savings account money?
- What type of life insurance has no cash value component?
- What happens when you die?
- What are the benefits of a cash value?
- How much money can you take out from cash value?
- How does money withdrawal from your cash value affect your face value?
- What does“Face value vs Present value” mean?
What does the face value of life insurance mean?
The face price of a lifestyles coverage coverage represents the quantity of money the insurer agrees to pay to the beneficiaries after the demise of the policyholder. It’s the guaranteed sum stated in the policy, providing financial security to the policyholder’s loved ones in the event of their passing. These funds can be used by the beneficiaries to pay funeral expenses, pay debts, maintain a quality of life or for various purposes Essentially, the face value serves as a financial safety net, offering support and stability to the family during a challenging time. When choosing a life insurance policy, understanding the face value is crucial, as it determines the extent of protection your loved ones will receive
What is the face value of any life insurance policy?
According to the Wikipedia of life insurance “Investopedia” the face value of any life insurance policy is its death benefit payout, its coverage amount. It stays fixed for lifetime after you sign your life insurance contract with your chosen agency.
The death benefit can change if you add a rider or add-on to your original life policy. It might be liable to changes if you choose an IUL Indexed Universal Policy or a VUL Variable Universal Life policy. IUL and VUL are types of Universal Life, and both let the policyholder invest his cash value money in the investment market.
For easy understanding remember, these are all the same:
- Life insurance policy coverage.
- Life insurance policy face value.
- Life insurance policy death benefit.
What is the cash value of any life insurance policy?
Now what is the cash value? It is the most profitable part of your life insurance policy for you, yourself. When you buy a life insurance policy, your purpose is to cover your beneficiaries. Quite selfless; but cash value is accumulated over decades, and this part is for you.
The biggest difference between face value and cash value is, that face value is only after your death, for your family. Cash value is for policyholders and offers “Living Benefits”, to him for emergencies and lifestyle growth.
How does money go to a cash value account?
Firstly, we already understand that cash value only exists for permanent life policies like: Universal life, Whole Life, IUL Indexed Universal life, VUL Variable Universal life, and Variable Life insurance policies.
Secondly, the premiums for permanent policies are 10-15 times higher for permanent policies and they are split 3 ways: funds the face value, funds the cash value, funds the insurance agency.
The money in cash value keeps getting collected for decades tax-free, it has a certain 3%-10% interest rate on it. If you do not borrow any money from it in 10-15 years of your life insurance policy, it will have a large amount of money in store.
How is cash value money better than savings account money?
- For a savings high yield bank account, your money is not tax-free.
- For your life insurance cash value account, the lump-sum is not taxable.
What type of life insurance has no cash value component?
Term life insurance policy is temporary in nature. It covers your beneficiaries for a certain term from 5-40 years, maximum. It is an extremely affordable and most popular type of life insurance, among youngsters in the US. But mostly people convert it to permanent when they become sensible or resourceful, later in life.
Term life does not have a cash value component. It is for a term and if you outlive your term, it expires. Your beneficiaries are no longer covered and will not receive the face value of the term life. If you’ve bought ROP Return on Premiums Term Life policy, you will get a full refund plus interest money, from the premiums you paid. But you have to opt for a refund in the free look period.
What happens when you die?
After your death; your beneficiaries file a claim with your life insurance firm. They just need the policyholder’s policy number, your contact details, his social security number, the verification that you are the named beneficiary on his policy; and your claim is processed.
Usually it takes 30-60 days to process the claim for permanent life insurance policies. Only burial insurance pays out in 24-48 hours after claim approval.
Once your claim is approved, your beneficiaries receive the face value/ death benefit payout of your policy. They will use it for your funeral costs, pending medical bills. The remaining will go for their income replacement, kid’s college expenses, house renovation or anything they need.
Let’s make it clear through a real life example, if you bought a whole life policy for face value $100,000. You died, your beneficiary’s claim got approved after 60 days. When you were alive, during your last days, you borrowed or took a loan of $5000 from the cash value of your whole life policy. But you failed to repay it. Your beneficiary will get face value minus unpaid life insurance loan.
- Face value-unpaid life insurance loan
- $100,000-$5000=$95,000.
What are the benefits of a cash value?
Like stated above, you can borrow money while you are alive for a financial crunch, for a medical emergency, for house decoration, for cruise vacation, child college expenses or anything urgent.
The only thing to remember is, paying it off quickly. It is not difficult to pay it off, you can pay future premiums with cash value and save premiums amount. Pay it off as soon as possible!
How much money can you take out from cash value?
You can borrow up to 90% of your present Cash Value Amount, if you have $100,000 coverage/face value policy. After 10 years your cash value is $10,000; you can borrow a life insurance loan of $9000 from it. Loan has a small amount of interest payable on it. You can save some money and over time, you can return your loan.
How does money withdrawal from your cash value affect your face value of a life insurance policy?
When you take out a loan against your cash value account of your whole life insurance policy, you can decrease the death benefit, if you do not pay back that loan before your death. You have enough time till death, it is advisable to keep borrowing from the cash value whenever you really need money.
Then pay it back at your own pace, however, keep track of your withdrawals. if you borrow a loan which exceeds 90% of the policy’s cash value, your policy will lapse.
What does “Cash value vs Face value” mean?
This is also an idea which can best explain the difference of face value and cash value of any life insurance policy. Face value is fixed (except for rider or add-on) while cash value keeps accruing over time (keeps changing and growing over time, called cash value build up). The cash value at one point in time, will be the present value of your life insurance policy.