Cash value and face value are two elements that make up a permanent life policy. Whole life and universal life policies are considered permanent life insurance because they will provide coverage for the lifetime of the insured. Both the cash value and face value are different in terms of how their monetary amounts are determined. However, the cash value, along with the face value, can increase or decrease the amount payable to the beneficiary upon the insured’s death.
Face value is the initial value of the policy. This is the basic amount the beneficiary would receive when the insured dies.
Cash value is the money the life policy earns through investments by the insurer. Permanent life insurance policies, such as whole life and universal life, have cash-value accounts, while term life insurance does not.
Benefits of Cash Value
The money that is in the cash-value account grows, tax deferred, which means there are no tax implications on the funds until they are withdrawn. Also, if a policy owner decides to access the money in the account by taking out a ‘policy loan’, the money is received tax free and doesn’t have to be repaid.
How Cash Value and Face Value Work Together
Beneficiaries can receive a higher payout when the insured passes away if the policy had additional riders attached and/or if there are funds in the cash-value account. However, even though the policy loan doesn't have to be paid back, if it is outstanding at the time of death, the face value will be decreased by the amount.
Whole Life policies, and one of two options of universal life policies--Option B--pay the cash value in addition to the face value upon death. A second option with universal policies--Option A--does not. In fact, the cash value is used to pay the final death benefit. The more money in the cash-value account, the less money the insurance company has to pay. For example, under option A, a $50,000 universal life policy with $20,000 available in the cash-value account will pay out $50,000 to the beneficiary--$20,000 from the cash-value account and $30,000 from the insurer. Under option B with the same policy, the $20,000 in cash value would be added to the $50,000 face-value amount to create a $70,000 death benefit. People choose Option A because it keeps the premiums lower than Option B, while providing a level death benefit.