Net amount at risk

The net amount at risk (NAR) is the difference between a policy's death benefit and its cash value (or, in actuarial terms, its reserve). It represents the pure insurance protection the insurer is providing at that moment, because the cash value portion of a death benefit is, in effect, the owner's own money being paid back.

Formula: net amount at risk = death benefit − cash value. Say, hypothetically, a universal life policy has a $500,000 death benefit and $150,000 of cash value: the NAR is $350,000. In universal life, monthly cost of insurance charges are calculated on the NAR, so growing cash value under a level death benefit lowers charges, while an increasing death benefit keeps the NAR at the full specified amount.

The NAR explains several things policyholders notice. On a level death benefit policy, the pure insurance shrinks over time as cash value grows. If cash value falls, from weak credited rates, loans or underfunding, the NAR rises just as cost-of-insurance rates climb with age, which speeds up the drain and can lead to lapse. Insurers also use NAR to decide how much risk to pass to reinsurers. See Universal life death benefit options A and B and universal life cost-of-insurance increases and what to do.