What is the difference between the face value and cash value of a life insurance policy?

The distinction between face value and cash value of a life insurance policy is crucial for understanding how these components function within the overall policy.

The face value, also known as the death benefit, represents the amount that the insurance company agrees to pay the beneficiary upon the death of the insured. This value is predetermined at the issuance of the policy and remains constant, providing financial protection for the insured’s dependents or designated beneficiaries.

On the other hand, the cash value refers to the savings component of certain types of life insurance policies, such as whole life or universal life. This value accumulates over time as the policyholder pays premiums. A portion of these premiums contributes to building up the cash value, which can grow depending on the type of policy and any applicable interest rates or performance of investments tied to the policy. The policyholder can access this cash value through loans or withdrawals, making it a valuable aspect of the policy for potential future needs.

Thus, the correct answer highlights that the face value is the amount paid upon the insured's death, while the cash value represents the amount that accumulates as the policyholder pays premiums during their lifetime.