Life Insurance Face Amount: What It Means and How to Choose

When you buy life insurance, you’re buying assurance that when you die, your insurer will pay out a sum of money to your loved ones. That number is known as your policy’s face amount, or face value, and it affects how much you’ll pay in premiums.

While it usually stays the same, there are a few situations that can trigger a change in face value.

What is the face value of life insurance?

The face value is the amount of money your insurer has agreed to pay out when you die. You choose the life insurance face amount when you buy a policy, and the amount is stated in your contract.

The face value is typically how much your life insurance beneficiaries will receive if you die while your policy is in force. So, if you buy a policy with a $500,000 face value, in most cases your life insurance company will pay out $500,000 to your beneficiaries when you die.

Choosing the right life insurance face amount

The goal is to choose a policy you can comfortably afford that will allow your beneficiaries to continue living the lifestyle they’re accustomed to.

Here are a few things to consider:

Your coverage needs. To calculate how much life insurance you need, think of your current expenses, including rent, mortgage or credit card payments, groceries, bills, child care and schooling. Next, consider any expenses you expect to pay for in the future, like college tuition or care for aging parents. Ideally, you want to take out a policy to match the dollar figure you end up with.

Another way to crunch the numbers is to take your salary and divide it by 4% or 5%. With a life insurance death benefit of this amount, your heirs could replace your income by earning a 4% to 5% return on the lump sum they receive. If you earn $50,000 a year, this could mean choosing a policy with a face value of $1 million to $1.25 million.

Your budget. Generally, the larger the face value of your policy, the higher your insurance premiums will be. Once you’ve decided how much coverage you need, compare life insurance quotes to get the best price.

The amount of life insurance you’re eligible for. Some types of life insurance are capped at small amounts. For instance, final expense life insurance policies typically range from $2,000 to $25,000, as they’re designed to cover funeral, burial and end-of-life costs, and not much else.

In other situations, you’ll need to qualify for a certain level of coverage:

• You’re applying for a large life insurance policy. Want to buy a million-dollar life insurance policy, or even more? Expect your insurer to request proof of your income or net worth to justify your need for a large policy as well as your ability to pay premiums. And while policies of any size can require a life insurance medical exam, large policies may require extra health tests, such as a treadmill electrocardiogram.

• You’re in poor health. You may have limited coverage options if you’re buying life insurance with a pre-existing medical condition.

» MORE: Average life insurance rates

When your face value might change

Typically, your life insurance face amount doesn’t change. You decide on that dollar figure when you buy the policy, and it stays steady until the policy expires or you die.

But there are a few things that can cause the face amount — or at least the life insurance payout — to go up or down.

You activated an accelerated death benefit rider

An accelerated death benefit rider allows you to access a portion of your policy’s payout — usually 25% to 95% — while you’re still alive. It typically applies if you’re diagnosed with a serious illness that shortens your life expectancy or requires extraordinary or around-the-clock care.

The money is then subtracted from your death benefit, which can lower the face value of your policy. Let’s say you have a $250,000 policy, and decide to withdraw 50% of the death benefit to pay for medical expenses. You’ll get $125,000 in cash, and your beneficiaries will receive the remaining $125,000 when you die.

You opted in to a guaranteed insurability rider

This rider allows you to add coverage to your policy later on without taking another medical exam or answering health questions, effectively increasing the face value.

Often called a “guaranteed purchase option rider,” the guaranteed insurability rider usually allows you to buy more coverage at regular intervals or when you experience a major life event, like having a child.

You took out a loan against your policy’s cash value

One of the perks of permanent life insurance is its ability to earn cash value over time. When you’ve built up enough cash value, you can begin borrowing against your policy.

While you don’t need to pay back the loan, the outstanding sum will be taken from the death benefit when you die to repay your insurer.

» MORE: When to borrow against a life insurance policy

You withdrew some of your policy’s cash value

On most permanent life policies, you can get cash from your life insurance by withdrawing a portion of its cash value. This typically lowers the face amount.

You asked to increase your coverage

Need more life insurance? Some insurers will let you top up your existing coverage, though you’ll usually need to go through the life insurance application process again, as the insurer is taking on more risk.

You reduced your policy’s face value

On the flip side, most insurers are open to you lowering the face value of your policy.

If you have a term life insurance policy, you’ll likely end up with a lower premium. And if you reduce the face value of a whole life insurance policy enough, your insurer may consider you “paid up.” This means you’ll be off the hook for premiums, but your coverage will stay active.

You own a decreasing term life insurance policy

With decreasing term life insurance, your policy’s face value shrinks over time until your term expires (though premiums may stay the same).

This type of insurance is typically tied to a debt that decreases over time, such as a mortgage. That way, if you die during the term, your loved ones will be able to pay off the debt with your policy’s payout.

» MORE: Mortgage life insurance vs. term life insurance

You have a universal life insurance policy

Also known as “adjustable life insurance,” universal life insurance offers flexible death benefits. You can increase or decrease the payout to reflect your needs, which then changes the face value of your policy.

Variable universal life insurance also has this benefit. Just know you might need to take another medical exam to qualify for more coverage.

Your policy has an increasing death benefit option

Some permanent life insurance policies have an increasing death benefit option, which means the death benefit is increased by the cash value. Beneficiaries receive the face amount of the policy plus its cash surrender value. Policies with an increasing death benefit typically have higher premiums than policies that pay out only the policy’s face amount.

Your insurer finds out you lied on your application

Lying or omitting information in your life insurance application is a form of fraud. Plus, it could put the payout you’re leaving to your loved ones in jeopardy.

If the insurer discovers you lied in your application or failed to disclose a pre-existing condition, the company can reduce the death benefit or deny your beneficiaries a payout altogether.

» MORE: How mortgage protection insurance works

What’s the difference between face value and cash value?

Every life insurance policy has a face value, but only some have a cash value. This is the savings component of a permanent policy, and you can generally access it after you’ve had your policy for two to five years.

While the life insurance cash value earns interest over time, it usually doesn’t affect your policy’s face value.

Key features of face value vs. cash value