What is life insurance at face value?

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There are often multiple different types of values that are associated with permanent life insurance policies. If you are trying to decide which type of life insurance you would like to buy or how much insurance you need, it is important that you learn about the different features of each type of plan. Life insurance at face value may not really show you the entire picture when you are buying a product to add to your estate planning or your investment portfolio. Start comparing life insurance rates now by using our FREE tool above!

Believe it or not, your life insurance death benefit may not actually represent how much the carrier will pay your beneficiaries upon death. Find out more about the difference between the death benefit (or policy face value) and cash value by reading on. Also, learn about the added benefits that may come along with comprehensive plans, and you will be ready to build a personalized policy that provides a sufficient level of protection. Once you read this guide to life insurance values, you should easily be able to determine the face value of a policy on your own.

What is a life insurance face value?

Many people are not aware of the fact that the face value is just another way to describe a life insurance death benefit. When you are purchasing a life insurance policy, whether it is a term plan or a permanent plan, you will need to select a state dollar amount that your beneficiaries will receive upon your death.

This stated dollar amount must be selected at the time of application because the premiums are based on the amount of coverage that is being provided.

In addition to choosing the dollar amount that your beneficiary will receive, you will also need to decide whether you want your face value to be paid out in a lump sum or in special intervals that you instruct. In most cases, the death benefits proceeds that are paid out to a beneficiary directly or to a listed trust will not be taxable. There may, however, be tax consequences in some cases.

When is a face value claims payout considered taxable?

In a majority of cases, the proceeds that a beneficiary receives after the death of a named insured will not be taxable, but there are special circumstances where there will not be a federal income tax exemption.

Knowing this special cases is crucial when you are selecting a death benefit that will be enough to cover your debt while still providing your loved ones with enough to cover living expenses while replacing your income. If you end up falling into a circumstance where proceeds can be taxed or claimed, the proceeds may not be enough to cover your financial obligations and to help your loved ones. Here are some of the cases you want to try about avoid:

  • When Your Request Payouts in Intervals Where Interest is Earned

If you do not request your benefits to be paid out in a lump sum, having the settlement paid to your beneficiaries in a series of installments can lead to tax consequences. This is because a portion of the installment that is paid to a beneficiary may include interest. The principal of the death benefits portion will not be taxed, but interest earned in the life annuity payment will be.

  • When There is No Beneficiary or the Estate is the Beneficiary

You might think that you are covered if you list your will and testament as your beneficiary and then place instructions on how the estate should be divided. While this does help with dividing your assets, it does not help you in terms of life insurance settlements. When you do not list a beneficiary or you voluntarily choose to put solely your estate, the life insurance will be included as an asset.

Since assets in your estate are subject to taxes when the estate exceeds the year’s threshold, there is a chance that your life insurance proceeds will be taxed because of your choice to list your estate or your failure to list a contingent beneficiary.

  • One Spouse Dies and the Other Must Fulfill Tax Obligations

The IRS cannot seize monies that are owed by the benefactor unless the beneficiary is their spouse and they share joint debt. If one spouse were to pass away and they both owed taxes, the surviving spouse would only receive the proceeds that are left after the back-taxes and fines have been taken out of the disbursement.

None of these situations are ideal, and this is the prime reason why estate planning and professional advice is so important when you are building your life insurance portfolio.

What type of policies has cash value?

All life insurance policies will have a face value, but not all policies have a cash value. Term insurance is very useful when you want to cover short-term financial obligations and debts for the lowest amount out-of-pocket, but it does not include a savings component that leads to cash value. In order for a policy to have a cash value, it needs to have a savings component. The only policies with savings components are permanent plans that offer the named insured with a face value that is selected for the remainder of their life.

How does a policy build cash value?

Now that you understand that permanent life is the only type of insurance that may have cash value, you need to understand how cash values accrue. While the cash values accrue differently between whole life and universal life policies, the premise behind cash values is the same. Premiums for permanent life insurance will go towards both the cost of pure life insurance and the cash account that earns a fixed amount of interest.

The money in the cash account that earns interest and may be applied to the death benefit or tapped into as a living benefit in the form of a loan or a cash withdrawal. As a key characteristic of permanent life insurance, it is critical that you understand how your account values can accrue and the benefits of allowing these values to sit in your account untouched.

Do cash values always match the face value of the policy?

In the life insurance industry, when the term face value is used it does not include any cash values that exist. The face value and cash value are two independent terms that are often mistaken for one another. Cash values of a policy almost never match the face value unless the policy is funded in a way that the cash values pay the premiums for the death benefit.

The face value will be the death benefit paid and the cash value is the actual amount that will be paid if you chose to surrender your policy before its maturity. Since you are not entitled to the death benefit at the time of the surrender, the cash value will always be lower than the face value when you are voluntarily cashing out.

Are cash values taxable?

If you surrender your policy, the cash values paid out can be partially taxed. The difference will equal the amount that was earned in the investment and will be considered taxable income for that year.

Typically, the money that is paid into the policy will be deducted from the amount before anything.

If you choose to only request a loan against your cash values, you will not face tax implications unless you allow your policy to lapse. This is because you pay your premiums with after-tax money and you have the intentions of keeping the policy active. If there is a proceeds payout before the loan is repaid, the amount will just be subtracted from the payout to the beneficiary.

Other Riders that Can Supplement the Payout

Cash values can add to the total value of your insurance plan. In addition to this, there are riders that can create value that cannot even be equated in the cash value or the face value amount. This is because some riders that are added to the policy will only provide additional payment to beneficiaries when a specific type of incident occurs or when you are diagnosed with a critical illness or disability. You should look into optional life insurance riders when you are building your plan on your own.

Life insurance may seem like a simple product to understand, but you must know the inner workings when you are building your portfolio. If you are ready to buy a life insurance policy that has a sufficient death benefit and offers the opportunity to build cash value, it is time to price the cost of coverage today. The key to finding a plan that is affordable is to comparison shop. To do this, enter your zip code in our FREE rate comparison tool below and compare instant quotes from all of the best insurers in the marketplace.

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