Terminology is the study of term insurance… just kidding. Bad joke? Now you know how my wife feels. Moving on… It is important to understand the terminology used to describe life insurance. Below are a few of the more important definitions to understand.
Face value (face amount)
The amount of coverage purchased by the policyholder. Most of the time this is equal to the death benefit (there can be exceptions).
The amount paid to the beneficiaries by the insurance company upon death of the insured. Most of the time this is equal to the death benefit (there can be exceptions).
The amount of death benefit that is paid by the policy (insurance company). For term policies the entire death benefit is pure death protection. For cash value policies death protection is equal to the death benefit minus the accumulated cash value. For ordinary cash value policies the amount of death protection decreases as the cash value increases. An example: If the face value of a policy is $100,000 and the cash value accumulated to date is $20,000, the value of death protection is $80,000. As the cash value increases to $40,000, the amount of death protection decreases to $60,000 in order to equal the $100,000 policy face value to be paid out to beneficiaries.
Cancellation of the policy by the policy holder. Surrender charges are usually involved.
Cash surrender value
Amount of the cash value that the policyholder is entitled to after surrendering a policy. Typically this value is equal to the cash value of the policy minus the surrender charge.