we're now going to talk about a concept called net amount at risk now net amount at risk is an important concept when we think about universal life because the net amount of risk determines how much we are going to charge the customer every month for the pure risk that they're taking that insurance portion you remember way back when when we talked about term insurance where term insurance was primarily risk coverage so if I had a term insurance plan for $100,000 of insurance I would have $100,000 of pure risk that I'm covering when we talk about universal life and permanent insurance plans we said the difference between those types of plans and term insurance is that we are able to accumulate term uh cash value and so I'm not going to go to the board and explain to you how we calculate the net amount at risk and why it's important in determining how much we charge people for their cost of insurance for that specific month in our discussion about universal life uh we talked about the account being processed on a monthly basis and that the cost of insurance is actually calculated monthly now in order for insurance companies to determine what that cost of insurance is they they need to understand or they need to calculate what we refer to as the net amount at risk you'll see that in your text material uh referred to as the Nar n a and so let's uh uh try to explain what the Nar is um very simply if you think about this as a representation of an insurance policy this is a graph on this axis I'm going to have do and over here we're going to have time and if I were to sort of put a line here which represents the death benefit on the policy so let's put this is the amount of the death benefit benefit here we go and let's say it's a policy that has a face amount or a sum insured of $100,000 and so this is a picture of the policy however because this is a permanent policy could be whole life uh could be universal life as I keep my policy uh I start to build savings and we refer to this savings as could be cash value in universal life we call this an account value and you can see that as the policy uh matures or goes on in time we are building more and more cash and more Savings in this policy now if in fact let's say the customer bought it at age 40 and this would probably the result at age 100 so we have a full picture over 60 years of this policy if the client unfortunately passes away at age 70 the insurance company is going to write a check to the beneficiary for the full death benefit they're going to write a check for $100,000 now that $100,000 is going to be made up of the clients cash account at that time of death plus an additional amount that the insurance company has to pay for out of its own pocket so my $100,000 death benefit that's going to the beneficiary is going to be made up of this amount plus this amount and let's say for example this happens to be ow $30,000 the client has an account value value of $30,000 when the client passes away the check of $100,000 is produced to the beneficiary and in fact the insurance company has to come up with the additional $70,000 in order to meet the $100,000 death benefit 70,000 plus 30,000 is going to be $100,000 death benefit you can see the amount that the insurance company is going to have to come up with out of their own pocket as the policy gets older the amount actually decreases and so this amount in this part of the diagram is referred to as the net amount at risk the Nar this is the amount that's at risk to the insurance company and so as a policy ages the Nar net amount at risk decreases and so uh we need to understand this concept that our Nar is always going to be the full death benefit minus whatever our account value or cash value is at a given time uh moment in time and so it's important insurance companies need to calculate the Nar and the Nar is what is used in a universal life in order to calculate your cost of insurance every month so hopefully that gives you a sense of the concept of the net amount at risk okay so we're back and let's look at the formula for determining the net amount at risk when we looked at our diagram that we just recently uh reviewed we found that the difference between the death benefit and the account value is what's referred to as the net amount at risk and so when we need to calculate how much you must pay that month for your cost of insurance we need to determine the net amount at risk so the net amount of risk is the death benefit of your policy minus what's in the investment account and so every month the insurance company will determine how much is the net amount at risk we say the Nar and how much is that because I need to know how many thousands that is if in order to calculate how much I'm going to charge the customer for his insurance cost that month remember on universal life when we talk about cost of insurance this is not your annual premium universal life basically allows you to put in whatever amount you want I want to put in $100 a month or $200 a month this is these are the deposits that you're putting in but every month we must take out some of that money from your account in order to cover the cost of insurance insurance that month so you'll see the cost of insurance is the net amount at risk times the cost per thousand per month of mortality and so cost of insurance is equal to the net amount at risk times the mortality cost per thousand now in Universal Life the consumer has a choice as how he wants to pay for his mortality cost he can pay for his mortality cost each year and so because we know as we get older every year our risk of dying increases that means our cost of insurance increases every year and so a consumer can choose to pay for his cost of insurance with yearly renewable term and so this year it may cost him 43 cents per thousand per month next year if he she is a year older it may cost 50 cents per thousand per month and so on and so on so when you get up into your 80s uh the cost because you're paying just for your pure mortality cost that year the cost can get pretty significant as we get older and so we can choose yearly renewable cost of insurance and pay increasing amounts every year or the other alternative is a level cost of insurance level cost of insurance says it's going to be for example 72 cents per month per thousand forever so in the initial going level cost of insurance is going to cost you more per thousand per month than yearly renewable term of of insurance the reason obviously is that the level cost the reason we can charge you a level amount for the rest of your life is that we're charging you a little bit early more in the earlier years and we're going to be able to charge charge you less in the later years that's the level premium concept so Under Universal Life the consumer has a choice they can choose yearly renewable term cost of insurance or they can choose a level cost of insurance let's look at an example of how we can calculate the net amount at risk let's say we have a plan that has a death benefit of $100,000 and today the account value is $11,500 you can see from the formula for the net amount at risk it's going to be the death benefit of 100,000 minus the account value the account value is 11,500 so my net amount at risk is $88,500 for that month how much is the insurance company going to charge me for $888,000 $500 of risk that month well they're going to go to the chart and it says oh based on my age today my cost is a130 per month per thousand and so they're going to charge me that month 88,000 or 88.5 because they're 88.5 th000 of risk times a130 that's going to be $115 5 for that month so for that month they're going to take $155 out of my account value to pay for my net amount at risk next month they're going to go through the same process but next month my account value might have been $11,700 because I had a good month the Investments went up uh and in fact my account value is now $11,700 so there going to recalculate the Nar that month which means it's going to be $88,500 and they're going to go through the process again of determining what my cost of insurance is going to be for that month so our cost of insurance for universal life in review yearly renewable term so my cost of insurance increases each year it's lower in the early years because I'm younger but as I I get older it can become very very expensive and in fact uh my account value my savings account might actually start to be depleted because I am not putting enough money in there each month to cover the cost of my insurance in my later years and so in a when when one selects the yearly renewable term I'm going to have early cash values are going to grow faster but in the later years my account value is going to start decreasing because those significantly higher cost of insurance charges are going to eat into my cash account level cost of insurance says oh my cost of insurance is going to be the same cost per thousand per month as long as I own this policy and so in the early going yes my cost of insurance is going to be higher but eventually over the long term it's going to be lower and in fact over the longer term my account value will be increasing more than if I in fact used the first option which is yearly renewable cost of insurance