Can you explain cash value vs the face amount life insurance?

UPDATED: Apr 7, 2014

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Asked April 7, 2014

2 Answers

Insurance policies can be a little complex to figure out. There are several different types of policies to choose from. First lets discuss cash value. Simply put a cash value insurance policy allows the policy holder to cash in on the policy up to the equity that has been paid in on the policy. On the other hand a face amount life insurance policy doesn't have that option. This policy can only be cash in upon full maturity at the time of death of the insured. Each of these policies have it's advantages and disadvantages. Everyone's circumstances are different,so you will have to decide which one works best for you.

Answered February 16, 2016 by mziarnik

When you buy a permanent life insurance policy such as a whole, universal, or variable life policy, you may discover that the policy has two vales, the face value and the cash value. These are not variations of the same value, but are actually two different accounts associated with the policy.

Face value is the amount you purchase the policy for, and is used for all life insurance policies, even term life. Regardless of the performance of the policy investments, the face value of the policy will not change. For example, if you purchase a whole life policy for $200K, your named beneficiaries will receive the face value after you pass away even if the investments of the policy have gone bust.

The cash value associated with a policy behaves much differently. The policy begins with a $0 cash value, and that amount increases over time. The way it works is that a portion of each premium goes into the cash value, and then the accumulated amount earns interest on the value as well. When the policy investments perform well, the cash value can become quite large, but poorly performing investments can result in the cash almost completely disappearing.

If you can borrow against your life insurance policy, it is the cash value that you borrow against, not the face value. You still have to pay back the loan and interest charges, but there is no credit check required to get a loan against a life insurance policy. If you pass away before the loan is repaid, the balance owed will be subtracted before the policy pays out to your chosen beneficiaries. In some rare cases, the outstanding balance may exceed the cash value of the policy, in which case the difference is subtracted from the face value when the policy comes up for settlement.

Answered April 7, 2014 by Anonymous

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