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If you purchase life insurance, it goes along with the death benefit. The death benefit is the sum of the insured’s life insurance policy paid out when the policyholder passed away. There are two death benefits: the level death benefit and the increasing death benefit. These two types of death benefits are affected by the so-called net amount of risk.

Life insurance has the so-called account value. This account value is the value accumulated from the investment portion of your policy. When your policy has a level death benefit, this means that your death benefit is either the account value or the sum insured, whichever is higher.
If your policy has an increasing death benefit, this means that the death benefit is the sum of the account value and the sum insured. How does the net amount of risk affect your death benefit?

The so-called net amount at risk is the death benefit minus the account value.

If you are getting the level death benefit, the net amount at risk is small. For example, if the account value is Php150,000 and the death benefit is Php500,000. The insurance company that has to cover the death benefit is Php350,00 which is the net amount at risk. Thus if the insured died having that account value, the insurance company must shoulder the Php350,000 to issue a death benefit of Php500,000 because the policy already has an account value of Php150,000. Another example is when the accumulated value is Php550,000, and the death benefit is Php500,000. Technically, there is no net amount at risk since the value is negative.

If you are getting an increasing death benefit, there is always a net amount at risk while the policy is in force. For example, the accumulation value is Php50,000 and the sum insured is Php500,000. Thus the death benefit is Php550,000, and the net amount at risk is Php500,000. This is beneficial for the longer term since the investment portion of the policy will be able to gain increased value in the long run. The higher the account value, the higher the death benefit that the beneficiary will receive. The insurance charge is always costly in this type of death benefit since the stated specified sum insured will be covered by the insurance company.

The net amount at risk affects the cost of insurance, affecting the accumulation value and the monthly net return of your policy. So the earlier age you start your policy, the longer your policy will be in force, and the more your policy’s account value increases as the net amount at risk decreases. So if you want your policy to be more beneficial to you rather than an expense, start young in getting life insurance.