What is 'Net Amount at Risk'

Net amount at risk is the monetary difference between the death benefit paid by a permanent life insurance policy and the accrued cash value. For example, if a policy's death benefit is $200,000 and its accrued cash value is $75,000, then the amount at risk equals $125,000. The amount at risk determines the cost of protection provided by the policy.

BREAKING DOWN 'Net Amount at Risk'

In general, the cash value in a permanent policy is designed to grow, and this growth reduces the net amount at risk in a policy, which keeps the mortality cost at reasonable levels even though the actual cost per $1,000 of death benefit is growing every year. As an example of this concept in action, consider a whole life insurance policy issued for a face value of $100,000. At the time of issue, the entire $100,000 is at risk, but as cash value accumulates, it functions as a reserve account, which reduces the net amount at risk for the insurance company. Therefore, if the cash value of the insurance policy rises to $60,000 by its 30th year in force, the net amount at risk is then $40,000.

As age of the insured increases, mortality cost per thousand dollars of net amount of risk increases. As long as cash value continues to increase in a whole life policy, and those gains are greater than mortality costs and other expenses, a policy should continue to grow and remain in-force.

Net Amount at Risk vs. Legal Reserve

If a life insurance policyholder dies before age 100, the insurance company loses the net amount at risk for that person's policy. This loss is compensated by the premiums of those who haven't died yet and from income from invested premiums. Since the sum of the net amount at risk and the legal reserve equals the face value of the policy, the net amount at risk and the legal reserve are inversely proportional. As the legal reserve increases, the net amount at risk decreases. The main purpose of the legal reserve is to provide lifetime protection, but because more money is collected in premiums in the early years of a policy than is needed to cover the mortality charge, level-premium policies develop a cash value, which the policyholder can borrow against, or can surrender the policy for its cash value if the policyholder no longer wishes to continue the life insurance policy. However, the cash value is initially less than the legal reserve because of deductions of sales expenses and other acquisition costs.

  1. Add To Cash Value Option

    A common benefit option on life insurance policies wherein the ...
  2. Life Insurance

    A protection against the loss of income that would result if ...
  3. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  4. Policy Loan

    A policy loan is issued by an insurance company that uses the ...
  5. Adjustable Life Insurance

    A type of life insurance that combines features of term and whole ...
  6. Decreasing Term Insurance

    Decreasing term insurance is a renewable term life insurance ...
Related Articles
  1. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  2. Retirement

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  3. Managing Wealth

    Life Insurance With an Increasing Death Benefit

    Why buy a life insurance policy with an increasing rather than level death benefit
  4. Managing Wealth

    Mistakes to Avoid When You Own Life Insurance

    How to avoid some common mistakes that can cause tax and inheritance problems when you own life insurance.
  5. Insurance

    How Life Insurance Can Provide Retirement Income

    Universal life insurance can generate tax-free retirement income. Here's how.
  6. Financial Advisor

    Variable Vs. Variable Universal Life Insurance

    Do you know why you might need one policy versus the other? Read on to find out.
  7. Financial Advisor

    Which Life Insurance is Right For You?

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
  8. Financial Advisor

    7 Issues to Consider When Determining Life Insurance Coverage

    Seven issues to consider when buying life insurance to ensure the coverage is tailored to meet your personal financial situation.
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center