Many people have been asking what is face amount in life insurance is for a long time without success. If you are among those people, this is your article. That is because it shall discuss everything you need to know about life insurance and the terms used.
What is face amount in life insurance?
Life insurance companies use several ways to describe how much coverage they are willing to write for a given level of paid premiums. The way they do this is by referring to the “Face Amount” of the policy. In other words, the “Face Amount” of a life insurance policy is the amount of insurance that will be issued for every dollar of insurance premiums paid.
There are two ways the face amount of a life insurance policy can be described:
1. The Face Amount as a Percentage of Total Benefits – most often, this is expressed as 70%, 80%, or 90% of the beneficiary’s total benefits. That means if you have a $10,000 life insurance policy with a face amount of $7,000 (or 70%), then your $7,000 in coverage will represent 70% of the death benefit that will be paid to your beneficiary.
2. The Face Amount as a Fixed Amount – this is usually expressed as an exact dollar amount such as $7,000 or $8,
How face value of life insurance work?
The face value of life insurance works determines how much insurance will be issued for every dollar you pay in premiums. As we’ve just seen, it is used to determine the “Face Amount” of the policy. But, it is also used in the following ways:
It Determines How Much Will Be Withheld to Pay for Future Expenses – in almost every life insurance policy, part of what you pay for life insurance is used to pay for your burial expenses and other future funeral and related expenses.
Besides that, in most cases, life insurance companies use some or all of the premiums you pay to help pay for your care if you are sick or injured. That is done by using the money you paid in premiums to reduce or eliminate your future obligations to the company. The amount they use is based on several factors, which are explained below. In short, if you are a good risk for this kind of situation, then the insurance company will let you keep more of the money you pay in premiums; if you are not, then the insurance company will let you keep less.
What is face amount in life insurance?
Life insurance companies use several ways to describe how much coverage they are willing to write for a given level of paid premiums. The way they do this is by referring to the “Face Amount” of the policy. In other words, the “Face Amount” of a life insurance policy is the amount of insurance that will be issued for every dollar of insurance premiums paid.
What’s the difference between face value vs. Cash values?
Life insurance companies calculate how much they will withhold to cover future expenses by referring to what is called the “Cash Value” of your policy. The way they determine your “Cash Value” is by subtracting all of the expenses the insurance company has paid on your behalf since you became insured from the number of death benefits they have already paid out to your beneficiaries. There are two main reasons why the insurance company may decide to pay you benefits before your expenses are taken care of:
- They need the money to settle claims or pay judgments against them; and
- They want to make sure they have enough money to continue to pay claims and provide other benefits to your beneficiaries until those beneficiaries are no longer entitled to such payments.
In any case, it should be noted the insurance company is only using this method of determining how much to withhold to pay for future expenses as a “back up” or “fall back” position in case your actual costs exceed what has been paid by the insurance company on your behalf. Life insurance companies calculate how much coverage they will offer for a given level of premiums paid by referring to what is called the “Face Value” of your policy. The way they determine your “Face Value” is by adding up all of the death benefits they have already paid out to your beneficiaries and then multiplying that figure by some percentage (usually between 70% and 90%) which represents how much insurance the company wants to write for every dollar of insurance premiums you have paid. How Much Will Be Withheld To Pay for Future Expenses? Usually, when you first purchase life insurance, the “Cash Value” of your policy is close to zero, and, therefore, the insurance company will pay all of your future expenses as they come due.
How to calculate face amount in life insurance?
NOT by adding up all of your premiums! There’s at least one significant exception to the rule that says you must not use the “Cash Value” method to determine the face amount of your life insurance policy: If you are self-employed or if you are a sole proprietor or a partnership, you can use the “Cash Value” method to determine the face amount of your life insurance policy. How do you decide whether you are self-employed or a sole proprietor, or a partnership? The easiest way is to ask your insurance agent. If he doesn’t know, ask your banker.
If your agent or banker doesn’t know, contact your state department of commerce. What does all this mean to you, the insured? In most cases, using the “Cash Value” method to determine the face amount of your life insurance policy will result in a much higher “stacking limit” than the much more conventional method of adding up your premiums.
Conclusion
When it comes to determining how much life insurance you need, I suggest using the “Cash Value” method instead of the “premiums paid” method. It may not be perfect, but it is simple and easy to understand, and, more often than not, it will result in a much closer to the true figure you should have. By the way, in my opinion, when used by itself, the “Cash Value” method of figuring the face amount of your life insurance policy is too low.
I believe it should be raised to at least 70% of what the “Cash Value” method indicates. What about the Term of the Policy? Another critical decision you must make when purchasing life insurance is the “term” or length of time you want the policy to last. What determines the “term” of your life insurance policy? It’s simply the number of years you are insuring yourself. The shorter the “term,” the higher the cost of the insurance.