Difference between the face value and practical value in life insurance?

Difference between the face value and practical value in life insurance

 In this article, we explain the difference between these two concepts that it is necessary to know how to distinguish in life policies.

The face value and cash value in life insurance

In life insurance, two concepts can be a bit complex, but it is necessary to know how to differentiate. The cash value and face value concepts make up permanent life insurance.

Whole life policies and universal life policies are considered permanent life insurance since they provide coverage for the insured’s entire life.

Both cash value and face value are different in determining their amounts. However, both the cash value and the face value can increase or decrease the amount to be paid to the beneficiary after the insured’s death.

Definition of nominal value and practical value

Face value is the amount the policy or life insurance beneficiary receives when the insured dies. It is a fixed and known amount from the beginning of the life insurance contract that does not depend on the years that the event occurs.

The cash value is the amount paid to you for the life insurance policy if the insurance ends or is canceled before the event for which it was purchased occurs.

The concepts of face value and cash value can only be differentiated in permanent life insurance, whether whole or universal, since term life insurance does not have a cash value. In term life insurance, when the expiration term arrives when renewed for a more extended period or another life insurance is contracted to a different insurer, the insured is not entitled to a cash value.

Cash Value Benefits

One of the advantages of cash value is that it is not tax-deferred; there are no tax consequences until the funds are withdrawn. If the insured decides to access the funds through a policy loan, the money will be received tax-free and does not have to be repaid.

Another advantage is for the beneficiaries of the policy, who can obtain a more significant sum at the death of the insured if the policy has additional options associated with it or if there are no funds in the cash value account.

However, it must be taken into account that, although the policy loan does not have to be repaid, if it is exceptional at the time of death, the nominal value of what the beneficiaries will collect could be reduced to that amount.

Differences when collecting the practical value in universal life and whole life insurance

Whole life policies pay cash value plus face value after the insured’s death.

However, beneficiaries of universal life insurance can collect in two different ways:

  • Option A. The cash value is not paid but is used to produce the final death benefit. The more money there is in the cash value account, the less money the insurer will have to pay life insurance beneficiaries upon the insured’s death. For example, if an insured person has universal life insurance of €70,000, with €30,000 available in the cash value account, the beneficiaries would receive €70,000 upon their death, of which €30,000 will be in the cash value account and €40,000 the insurer would pay.
  • Option B. As with whole life policies, Option B pays cash value plus face value after the insured’s death. In this case, with a €70,000 life insurance policy with €30,000 in cash value, the insured can elect to have the cash value added to the face value, which would result in a €100,000 death benefit for the insured.

Most people tend to opt for option A because, although this option benefits insurance beneficiaries less than option B, the premiums that have to be paid are also lower.

By Master James

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