Understanding the Policy’s Face Amount: Death Benefit vs. Cash Value

The **Face Amount** is the most misunderstood term in Permanent Life Insurance. It represents the base death benefit amount the insurance company is contractually obligated to pay, but it is distinct from the Cash Value.

The Relationship: Face Amount and Net Amount at Risk (NAR)

The Face Amount remains constant (unless modified). The insurer’s risk is the **Net Amount at Risk (NAR)**, which is the difference between the Face Amount and the Cash Value:

$$ \text{Net Amount at Risk (NAR)} = \text{Face Amount} – \text{Cash Value} $$

As the Cash Value grows, the NAR decreases. The monthly Cost of Insurance (COI) is calculated only on the NAR, not the full Face Amount. This dynamic is why a policy can become self-sustaining over time, as the insurer’s risk exposure decreases.

Increasing the Total Death Benefit

In many policies, the total death benefit is the Face Amount *plus* the Cash Value (Option 2 in UL or by using the PUA rider in Whole Life). In this case, the total payout increases over time, offering both protection and legacy growth.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. Always clarify with your agent the exact death benefit option chosen to understand the final payout structure.