For any life insurance policy, the face value is the death benefit. This is the stated dollar amount that the policy's beneficiaries receive upon the death of the insured. In most cases, the face value is transferred to the beneficiaries tax-free. A policy's face value can be supplemented by additional benefits that have been added beyond the basic plan coverage. Face value is different from cash value.
To calculate the full benefit that is paid out to beneficiaries in the event of the insured's death, consult the schedule of benefits in the policy. Most life insurance companies also offer riders, which are additional benefits that can be purchased on a plan. For example, some riders stipulate that the face value doubles if the insured dies because of a specific type of accident. All together, the face value plus additional benefits are what constitute the policy's total death benefit.
Face value is one of the most important factors that influence the cost of a life insurance policy. A 25-year old woman trying to buy a term life insurance policy from Company XYZ would expect to pay more for a $500,000 face value policy than a $100,000 face value policy, for example. The face value is the amount that the insurance company is on the hook for should the woman die during the course of the term.
There are many different events that can trigger a change in face value for a policy. In some policies, cash value can potentially grow large enough that it actually causes corresponding increases in face value. Unpaid loans from an insurance policy can be deducted from the policy's face value. Sometimes, a reduced face value can be paid out in the event of serious injury to the insured. Any potential change in face value is addressed in the policy itself.
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