The Face Amount (also known as the Face of Policy) is the sum of money that an insurance policy guarantees to pay out upon the death of the insured or at the policy’s maturity. This term is crucial in both life insurance and annuity products, where it essentially represents the value stipulated as the amount to be paid by the insurer to the policy’s beneficiaries.
Examples and Types of Face Amounts
Example of a Face Amount
If a life insurance policy has a face amount of $100,000, this means that when the insured individual passes away, their beneficiaries will receive $100,000 from the insurance company.
Types of Face Amounts
Level Face Amount: This is a fixed amount that does not change over the life of the policy. For example, a term life insurance policy may have a level face amount of $200,000.
Increasing Face Amount: Some policies, like certain universal life insurance policies, may offer increasing face amounts. This means the death benefit increases over time, often to counteract inflation or increases in living expenses.
Decreasing Face Amount: Some policies, like mortgage life insurance, have decreasing face amounts. As the insured’s mortgage balance decreases, the face amount of the policy decreases correspondingly.
Special Considerations
Policy Riders Affecting the Face Amount
Riders are additional benefits added to an insurance policy. Some riders can affect the face amount:
Accidental Death Benefit Rider: Increases the death benefit if the insured dies due to an accident.
Cost of Living Rider: Adjusts the face amount based on the inflation rate to maintain the policy’s purchasing power over time.
Cash Value and Face Amount
For whole life and some universal life insurance policies, the policy’s cash value is different from the face amount. The cash value accumulates over time and can be borrowed against, but it is not necessarily the same as the face amount unless specified in the policy terms.
Historical Context and Evolution
The concept of face amount has evolved over centuries, with early forms of life insurance dating back to ancient Rome. Modern life insurance policies emerged in the 17th and 18th centuries, with structured contractual agreements specifying clear face amounts.
Applicability in Modern Financial Planning
Importance in Financial Planning
Understanding the face amount is crucial for:
- Estate Planning: Ensuring beneficiaries are financially protected.
- Debt Coverage: E.g., covering a mortgage.
- Income Replacement: Providing for dependents in the event of the policyholder’s death.
Comparing Insurance Policies
When comparing insurance policies, the face amount is a primary figure of comparison, along with premium costs, policy providers’ reputations, and added benefits or riders.
Related Terms
- Death Benefit: The amount paid to the beneficiaries upon the death of the insured. Frequently, the death benefit is equal to the face amount, but it can be adjusted by riders or policy loans.
- Surrender Value: The amount the policyholder receives upon surrendering a cash value life insurance policy before it matures or the insured dies.
- Premium: The payment made by the policyholder to the insurance company for coverage. Premiums can be paid annually, semi-annually, quarterly, or monthly.
Frequently Asked Questions (FAQs)
What happens if the policyholder outlives the policy?
If the policyholder outlives the term of a term life insurance policy, the insurance company pays nothing unless there are specific maturity benefits attached. In whole or universal life policies, the cash value may be paid out, or the policy may simply continue.
Can the face amount change over time?
Yes, depending on the type of policy and riders selected, the face amount can increase or decrease. Some policies have fixed face amounts, while others may be designed to adjust with inflation or other factors.
How is the face amount determined?
The face amount is determined by the policyholder’s needs and the insurer’s underwriting process, which considers factors like age, health, and financial situation of the insured.
References
- Smith, Brian S. “Life Insurance: A Guide to Policies and Riders.” Insurance Journal, 2021.
- Johnson, Robert T. “Understanding Life Insurance.” Financial Planning Association, 2020.
- “Life Insurance 101: Types and Benefits.” National Association of Insurance Commissioners, 2019.
Summary
The Face Amount of an insurance policy is the amount stipulated in the contract to be paid to beneficiaries upon the insured’s death or policy maturity. Understanding this term is key in financial planning, estate management, and in choosing the right insurance policy to meet one’s needs. The face amount could be level, increasing, or decreasing and can be influenced by various policy riders and terms.
