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In the entire insurance industry, the death benefit is a commonly used term. However, it might not seem simple to all. Unfortunately, most customers can not recognize the difference between the death benefit and face amount.

The face amount is purchased amount at the beginning of a contract. On the other hand, another one is the amount collected by a beneficiary after the death of an insured person. Once the insured one passes away, his beneficiaries will receive money.

Moreover, your family will get lots of financial benefits from a policy. One of the greatest benefits that you are going to get from an insurance plan the insurer will take the financial risk of your family.

Although in a general sense there are many benefits of a life insurance plan. But, the greatest benefit for a beneficiary comes in two forms- cash value savings and the death benefit.

In this face amount vs death benefit article, I’m going to explain how they come to play in your life insurance policy.

So, without any further delay, let’s begin.

Face Amount vs Death Benefit

differences

A life insurance policy is one of the best investment plans for your future.

I know, you love your family and there is no doubt that they deserve a better life even after your death.

A properly planned insurance plan can provide them with financial security so that they can continue their life without your presence.

Now, in every life insurance policy, you will come across these two common financial terms. One term is the face amount and another one is the death benefit that your beneficiary will get when you die.

The face amount is the purchased amount at the beginning of life insurance.  The face amount is stated in the contract or application. On the contrary, the death benefit is the amount of money that is paid to a beneficiary by an insurance company.

How & When They Differ?

When you first buy insurance, the face value is the amount stated on the insurance agreement. An insurance company tends to pay this amount as a death benefit after your death. Thus, it is the final money that your beneficiaries will get.

Indeed, when the policy starts, the face value and the death benefit remain the same. Both of these two terms count the premium that the carrier will pay out while valid claims. However, at times face value and death benefits start to differ from each other.

The face value can never change. Face-value remains the same always. On the contrary, death benefit changes. It depends on the conditions of the policy. For instance, while the system allows you are taking out loans, then the death benefit changes. It decreases.

Usually, the face amount and the death benefits are different when there are unique features in the contract. As we have already mentioned, loans are one example. However, your total benefit may increase depending on the situation.

Point of Differences

There are some key points when the face amount will get changed from the death benefit. We all know the difference between these parameters. But, be specific you need some key takeaways. Let’s dive deeper into the detection of face amount and death benefit.

#1. Accelerated Death Benefit (ADB)

When an insured is detected with illness, then this case takes part. Then a percentage of your face amount will be expedited as the death benefit. After your death, the beneficiary will get the amount.

However, the money that you received while alive will be deducted from the face value.  However, many companies may charge an extra fee for taking this option. Hence, you’ll have to pay that fee as well

#2. Loans Or Withdrawals

In some policies, you may take a loan from your cash amount. But, it could make you a lien. That means, if an insured doesn’t repay the taken loan, his death benefit would minus from face value.

#3. Universal Life Insurance (UL)

Universal life insurance lets you make two choices which are as follows.

Choice #1: Level Death Benefit – Beneficiaries will only get the face amount as per the initial insurance contract.

Choice #2: Increasing Death Benefit- It is another kind of exciting option in any kind of policy. The accumulated death benefit will be a combination of the face amount and the cash savings of the policy.

#4. Graded Benefit Whole Life Policy

Graded benefit policy increase death benefit. If you are going to buy a guaranteed acceptance life insurance, the entire death benefit will be somewhat different.

In most cases, this type of exceptional financial benefits is being offered in a guaranteed acceptance policy. Although you should be above of certain age to buy that kind of insurance, you will see it’s a great opportunity for aged people. Because generally, they don’t have a good health condition.

It will be near impossible for them to get a standard insurance policy. In this case, a guaranteed issue policy will make their day even shiner at their elderly age. This policy comes under a graded benefit system.

This system is quite simple, your beneficiary will not get a death benefit if you pass away in the first two years of the plan. If you die in this time period the nominated person will only get the premiums that you have paid.

However, it will come with an interest of course. But, if you die after these two years period, in that case, you will get the full death benefit.

Let’s see how it works.  Assuming that you have purchased an insurance amount of $5000 and you passed away within the eight months.

In this case, your beneficiary is going to get back the premiums you paid with the interest. However, he will not get any death benefit as you died within the two years’ time frame. This system was introduced to provide extra security to the insurance company.

How Face Value Changes?

The face value of a policy can be changed in many ways.

Face value changes up: If anyhow cash value of the policy increases, technically, in this case, the face value will be increased.

Face value changes down: In this case, unpaid loans will be cut, and ultimately face value will be decreased by it.

So, we can see that it can be changed in some specific ways.

Is the Death Benefits Taxable or Not?

tax freeFor most of the terms, the answer is no. However, there are some exceptional cases.

Usually, the money your beneficiaries will collect won’t be taxed.

If you have a life insurance policy, it is so obvious that after your death your family will receive the death benefit amount and they don’t have to pay tax for that money.

One thing you should know, there are some cases when the death benefit is taxable.

Following cases occur when a beneficiary is:

  • Excess Benefit

At times, Life Insurance Company pays death benefits over the real amount. However, there are different settlement options. In terms of these excess benefits, you will receive extra dollars. So, these additional dollars will be taxed as income.

  • Payment for Life

In many cases, the death benefit is delivered to beneficiaries as a periodic amount over their lifetime. In this policy, a recipient has to pay taxes for the death benefit.

How a Death Benefit Can Be Beneficial

No doubt, money can never ease emotional distress. If your loved one passes away, no amount of money can heal up your pain. However, the financial benefit from a life insurance policy reduces the financial burden. As your beneficiary is still alive they have every right to live a happy life.

Thus, everyone should insure his life. By an Insurance policy, his beloved one will be secured from financial risks.

Let’s check the benefits of death benefit:

  • Income Replacement

It will allow your family members to live their lives as before. With this money, they can pay tuition fees or get any what they need.

  • Burial Costs

Death is such a specific system that occurs in an uncertain time. So, there may still be some expenses after your death. Including, inhumation costs, final medical bills, and much more. The death benefit will recover the costs as well.

  • Contribution to Future Generations

Sometimes your beloved institutions also get support from your death benefit. For example, it can provide financial help to different public sector organizations.

Since insurance is a matter of reducing the risk of your beneficiary, you must invest in the policy wisely. As you know, replacing the income is a motive here. You can easily increase your annual earnings by doing a wise and calculated investment.

Therefore, your family members will live a happy life even after you die.

[Caution: Scrutinize your policy. Because the death benefit may change throughout the contract.]

Wrapping Up

We all know, most of the people are interested in a life insurance policy for getting the death benefit. Throughout life, you have worked hard for your family.

This hard work should not go in vain. A death benefit will let your beneficiaries live life as before. This is why you should understand how insurance policies work.

I hope you have already acknowledged enough sense from this comprehensive guide about-face amount vs death benefit. Make a further step & make your life insured enough with life insurance.