What’s the Difference Between Cash Value and Face Value?

Owning life insurance is a key part of long-term financial planning, but understanding the details behind your policy is just as important as having coverage in the first place. Two critical components that often cause confusion are the cash value and face value of a life insurance policy. While they’re both tied to your coverage, they serve very different purposes—and knowing how they work can help you make smarter financial decisions, especially if you’re considering options like policy loans, withdrawals, or even selling your policy through a life settlement.

Face Value (Death Benefit)

The face value, sometimes referred to as the death benefit, is the original amount of money the life insurance policy promises to pay out to your beneficiaries upon your death. This is the headline number you see when you first purchase the policy—for example, $250,000 or $1 million. It’s the core purpose of the policy: providing financial protection for your loved ones when you pass away.

Importantly, the face value typically remains fixed for the life of the policy (unless you purchase a rider or have a policy type that allows it to increase or decrease). This amount does not include any accrued interest or investment gains, nor does it reflect the policy’s internal cash accumulation.

Cash Value (Living Benefit)

In contrast, the Cash Value is a feature exclusive to permanent life insurance policies such as whole life, universal life, and variable life. It acts like a savings or investment component that builds over time as you pay your premiums. A portion of your premium goes toward the cash value, where it grows on a tax-deferred basis.

This accumulated cash can be accessed while you’re still alive—via withdrawals, policy loans, or as collateral. You can use it for any number of financial needs, from funding retirement to covering emergency expenses. However, tapping into your cash value may reduce your death benefit if not repaid, and withdrawals could have tax implications.

Why It Matters

Understanding the difference between cash value and face value can significantly impact how you manage your policy throughout your life. If your needs change, such as no longer requiring full coverage or facing unexpected expenses, knowing the available cash value in your policy gives you added flexibility. And if you’re over the age of 65 or facing a chronic illness, you may be able to sell your policy through a life or viatical settlement—potentially receiving a payout that exceeds the surrender value.

In these cases, the face value plays a major role in determining your policy’s market value, while the cash value may influence what you can receive directly from your insurance company if you choose to cancel the policy instead.

Reasons to No Longer Need Your Coverage:

There are many reasons to Sell Your Life Insurance Policy. Below are several common reasons to no longer need coverage.

• Often one finds themselves over covered, or they don’t need their coverage anymore because their children are grown and financially independent. The original purpose of having coverage is no longer needed.
• The life insurance premiums are too expensive. Often seniors find themselves with coverage they no longer want with insurance premiums too high. With growing, unaffordable premiums, a life settlement is often the perfect answer for many seniors who are looking to turn the financial burden of their policy into a cash asset.
• The cash from your life settlement is needed to fund your retirement, increase your financial freedom, or upgrade your living lifestyle.
• One has unanticipated medical or healthcare expenses. A life settlement or viatical settlement can be used to pay for much needed medical treatment, surgeries, or rehab, as well as covering long term care.

If any of these reasons apply to you and your current situation, then a life settlement may be a great option for you.

When deciding how to maximize your gains with a life settlement, it helps to understand the difference between cash value and face value in life insurance.

Face Value vs Cash Value in Life Insurance

The face value and death benefit of a life insurance settlement market are the same. For instance, a $500,000 policy has a face value and death benefit of $500,000.

Life insurance policies accumulate Cash Value of Life Insurance over time as premiums are paid, which can be accessed in two ways. Policy holders may borrow against the accumulated funds or surrender their policy for a payout. Repayment of loans allows policyholders to keep their plan active and access its benefits when needed most.

If you have an outstanding loan balance on your life insurance policy, it will be taken from the death benefits. However, selling your policy through a life settlement broker can provide you with much-needed cash while still alive – enabling you to reap the rewards of having had foresight and investing in such coverage!

Options for Accessing the Cash Value of Your Life Insurance

If you want to make the most of your life insurance policy, it’s essential that you understand cash value versus face value. Knowing this information can help unlock the financial benefits available in your policy!

If you own a permanent life insurance policy, it can be an advantageous investment. Your premiums will accumulate cash value over time and there are two ways to access this money: either through surrendering the policy or by taking out a loan against its accumulated value. Term policies typically do not offer these benefits, so understanding your type of coverage is important if considering accessing funds in this way.

Taking out a loan on your policy can be a good option if you are suddenly in need of cash but want to keep your policy in force. As long as you continue to pay your premium and the loan back, the policy and death benefit will remain intact.

Another option is to cancel your coverage by surrendering your policy for the cash value. This allows policyholders to forfeit their policy back to their insurance carrier for a portion of the accumulated cash value called the surrender cash value.

The last option is to sell your life insurance policy. Selling your life insurance can bring 4-10 more than forfeiting the policy for the Cash Surrender Value of Life Insurance. To help better understand how life settlement works, let’s look further into the types of life settlement options available.

Two Types of Life Settlements

When considering selling your life insurance, it helps to understand the two types of life settlements – traditional life settlement and viatical settlement. They are similar but have different eligibility requirements.

Traditional Life Settlements are the most common settlements. In general, one must have a minimum $100,000 policy face value, be minimum 65 years old, and have a permanent and transferable plan.

Viatical Settlements, on the other hand, are for policyholders with terminal or chronic illness with less than two years of life expectancy. While one must have a minimum of $100,000 policy face value to be eligible, there is no age requirement and term plans can be eligible.

Both options involve selling your life insurance for a one-time payment to someone who takes over payments and ownership of death benefit. The main difference between the two is that viatical settlements are tax-free, because they’re seen as an advance on one’s death benefit.

Can a Term Policy Be Sold?

Can You Sell a Term Life Insurance Policy? Certain Term policies can be sold. If one has a term policy and is suffering from terminal or chronic illness with less than two years of life expectancy, then they may be eligible to sell their term plan with a viatical settlement. If one is not eligible for a viatical settlement and would like to sell their term life insurance, then their term plan must have a convertible rider. This is a provision that allows the policyholder to convert their term plan into a permanent plan. Here, the term plan would have to be converted to a permanent plan before it’s sold.

Why Use a Life Settlement Broker?

Using a Life Settlement Broker often results in a return multiple times what the policyholder would have received shopping on their own. Brokers allow policyholders to benefit from receiving multiple offers for a policy off of one application rather than just one. If one is shopping on their own, each buyer contacted will require underwriting and medical evaluations which will take a few weeks prior to receiving just one official offer and then at the end, they have to start all over again.

It’s a complicated process. Having an ally on your side to help guide you along every step makes a huge difference. Life settlement brokers have a fiduciary duty to look out for a clients best financial interest. Buyers do not and are solely profit oriented. An experienced broker will know how to represent your policy in the secondary market in order to maximize your payout.

Next, let’s look at the steps to selling your life insurance through a broker.

Steps to Selling Your Life Insurance

Once you understand the terms and different types of settlements, the next important part to understand is the process. There are nine step to selling your life insurance through a broker. They are the application, documentation, review and underwriting, auction, the offer, closing process, the escrow, transferring of funds, and lastly, the rescission period. Let look more into the steps below:

1. The Application – First step asking about your age and health as well as policy. You will also be asked to sign medical release and insurance release forms.
2. Documentation – The release forms are used to gather all necessary documentation.
3. Review and Underwriting – At this stage, your application and documentation will be reviewed, and an underwriter will prepare a life expectancy report. An independent Life expectancy report may be ordered as well.
4. Auction – Once your package is prepared for the secondary market, the auction process will begin giving buyers the opportunity to bid on your plan.
5. The Offer – Once the auction is complete, your offers will be presented to you where you can decide to either accept or decline.
6. Closing Process – When an offer is accepted, a closing package is prepared including documents signing over beneficiary and ownership.
7. The escrow – Funds are sent into an escrow account pending transferring of ownership and beneficiary documents.
8. Transferring of Funds – Once transfer of documentation is verified complete, the escrow funds are released minus broker and escrow fees.
9. Rescission Period – The rescission period of two to three weeks depending on the state is the time-period one has to change their mind in order to cancel the life settlement and reinstate their policy.

Summary

Understanding the terms Cash Value and Face Value can help life insurance policyholders when deciding what to do with a plan that’s no longer needed. Through a licensed life settlement company, one can receive four to ten times more than what they would have received for surrendering the policy for the cash value. Life settlements present the perfect option for those policyholders who want to maximize their gains when cashing out. 

FAQS

1. What is the face value of a life insurance policy?

The face value (also known as the death benefit) is the amount of money the insurance company promises to pay to your beneficiaries upon your death. It’s the total coverage listed on the policy—for example, $250,000 or $1 million—and does not typically include any accumulated cash value.

2. What is the cash value of a life insurance policy?

The cash value is the savings or investment component that grows over time inside permanent life insurance policies (like whole or universal life). Policyholders can access this amount during their lifetime through loans or withdrawals, but it is not paid directly to beneficiaries unless the policy is specifically structured to include it.

3. How do face value and cash value interact?

They are separate components of a permanent life insurance policy. The face value is what’s paid to beneficiaries upon death, while the cash value is accessible to the policyholder while alive. In most standard policies, if you don’t use the cash value before you die, it reverts to the insurer and your beneficiaries receive only the face value.

4. Can the face value of a policy change?

Yes. In some types of policies, such as universal life insurance, the face value can be adjusted upward or downward. If you borrow against or withdraw from the cash value, it can also reduce the face value or death benefit unless the loan is repaid.

5. Is the cash value included in a life settlement offer?

Yes, cash value can impact the offer. In a life settlement, buyers consider both the death benefit and the cash value, especially if the policyholder has the option to surrender it. However, settlement offers are based more on the policy’s face value and premium requirements than on the cash value alone.

6. What happens to the cash value when the insured dies?

In most policies, the cash value is absorbed by the insurer and is not paid out in addition to the face value. However, some riders or specially designed policies allow for both to be paid, usually with higher premiums.

7. Which value is more important in a life settlement?

While both are relevant, the face value is generally the more critical factor in determining your policy’s market value in a life settlement. Investors are buying the right to receive the face value upon your death and must factor in ongoing premiums and life expectancy.

8. Can I access the cash value while I’m still alive?

Yes. If you have a permanent life insurance policy, you can access the cash value through withdrawals or policy loans. These funds can be used for anything—from medical bills to retirement income—but any unpaid loans or withdrawals may reduce the death benefit.

9. Do term life insurance policies have a cash value?

No. Term life insurance policies provide coverage for a set period (e.g., 10, 20, or 30 years) and do not accumulate any cash value. If the insured outlives the term, the policy simply expires without any payout or residual value.

10. Does cash value earn interest or investment returns?

Yes, depending on the policy type. In whole life insurance, cash value typically earns a fixed interest rate. In universal or variable life policies, it may grow based on market performance or interest rates, though returns are not guaranteed and may fluctuate.

11. Is the face value taxable to beneficiaries?

Generally, no. The face value (death benefit) is typically paid out income tax-free to beneficiaries. However, if there were policy loans or if the policy was sold in a life settlement, tax implications may arise. It’s best to consult a tax advisor in such cases.

12. What happens if my cash value exceeds my premiums paid?

If your policy’s cash value grows significantly, and you surrender the policy for cash, you may owe taxes on the amount received above your cost basis (i.e., the total premiums you’ve paid). However, gains inside the policy are tax-deferred until withdrawn.

13. How can I find out my current face value and cash value?

You can review your annual policy statement or contact your insurance provider or agent. The statement will typically show both the face value and the accumulated cash value, along with any loans or withdrawals that affect those figures.

14. Why is the cash value usually not paid to beneficiaries?

Most standard policies are designed so that the insurer keeps the cash value when the insured dies, paying only the face value to beneficiaries. This design keeps premiums lower. However, some policy riders can allow both values to be paid—at an added cost.