What is a Face Amount?
Setting the face amount
When an individual buys a life insurance policy on themselves or someone else, one of the main things they have to decide is the policy’s face amount. They might buy a policy with a face amount sufficient to cover their mortgage, for example.
The higher the face amount, the more the policy will cost.
Most life insurance companies cap a policy’s face amount at a certain level. If someone is buying a policy on themselves to provide for their spouse if they pass away early, the insurer might cap the face value at 20 times that individual’s salary, for example.
Who gets the face amount
When the insured dies, the face amount gets paid out to the beneficiaries named in the policy (minus anything that has pulled money from the benefit, which we’ve outlined below).
The beneficiaries can be one or more people or entities that the policy owner has specifically named in the policy. When the insured passes away, the beneficiary or beneficiaries file a claim to collect the policy’s death benefit from the life insurance company.
Things that can eat into the death benefit
While the face amount of a policy generally doesn’t change (unless you buy a permanent life policy that has a provision for increase or decrease), that number doesn’t necessarily equal the amount of money the policy beneficiaries will receive at the time of the insured’s death.
If, for example, you bought the policy with an accelerated death benefit rider and used that rider, the amount of money you used will generally be deducted from the face amount. Or if you bought permanent life insurance and took out a loan against the policy’s cash value and died without repaying it all, the life insurer subtracts the outstanding money from the face amount to arrive at the death benefit they pay your beneficiaries.
All told, if your beneficiaries will rely heavily on your policy’s face amount, you should be mindful about choices you make while you’re alive that could affect the death benefit they receive.