What is the Difference Between Face Value and Cash Value?
Face value and cash value are the main elements of a permanent life policy. Two of the major types of permanent life policy are universal life and whole life policies. Both of these insurance policies provide individuals with a lifetime of insurance coverage. Nevertheless, it would be best if interested clients of insurance policies be aware of the difference between these two elements because it can greatly affect the amount of premium you will pay in your policy. The benefits and advantages of these elements in a policy will be briefly discussed below.
This refers to the death benefit the beneficiaries will receive upon the death of the policy holder. It is also the maximum amount payable that is written and agreed upon in the policies declarations page. It is the apparent value of the policy which is often the amount disputed in court in cases of double indemnity.
It is referred to in most insurance contracts as cash surrender value or surrender value. It is the amount which a surety company gives a policy owner for cancellation of contracts and is normally associated with life insurance types of contract.
Cash value is also the amount earned through the investments made by your insurance company through the premiums you have paid. This is a feature of permanent life insurance which is not enjoyed by owners of term life insurance.
Guaranteed Cash Value
This is determined based on the applicable surrender charge of the policy and its base amount. At times, contracts explicitly state the guaranteed cash values of the purchased policy. It does so by referring to the amount of the specific investment used by the surety company which is also subject to the insurance company’s discretion.
Benefits of Cash Value
The money invested in cash value grows and is tax deferred. This means that all of the profit received by the policy holder in this policy will have no tax implications until it is finally withdrawn by the policy owner. The policy owner has the option to use the amount and use it as a sort of policy loan wherein the money received is 100% tax free and does not need to be paid at all.
How Face Amount and Cash Value Work Together
If the policy holder wish to have more money for his family upon his retirement then it would be more profitable if there are additional riders that are attached in the cash value account. Moreover, you should also be cautious of the amount of policy which you take out from your policy because this will mean decreased amount upon your retirement.
Options offered by Universal Life Insurance Policies
There are two possible options for universal life policies. The first option is to pay the cash value only after the death of the policy holder. The next option entails using the cash value in payment for the face amount value which is seldom encouraged because it will lead to less or almost no amount received by the beneficiaries. But even if this is seldom encouraged by the surety company, more beneficiaries still prefer Option A because it keeps a lower premium payment rate while still maintaining a level of death benefit.