Also known as the “net amount at risk” or NAR, this term refers to the difference between a permanent life insurance policy’s face value and the cash value it has accrued to date. For example, if a policy’s face value is $200,000 and its cash value is $125,000, the amount at risk represents the difference, or $75,000.
In property and liability insurance, the amount at risk may be the policy limit or maximum possible loss-whichever is lesser. The insurance company loses the net amount at risk as a cost of doing business if the insured dies before the age of 100 by paying out that amount to beneficiaries. It then compensates for this loss through the premiums paid by those they insure who are still living-and the investments made using those premiums.
From the Internal Revenue Service’s perspective, a corridor of protection or net amount of risk must be apparent in a life insurance policy if the policy is to retain its tax-advantaged treatment.