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What does "Amount at Risk" Mean?

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  • Written By: N. Madison
  • Edited By: Angela B.
  • Last Modified Date: 25 October 2016
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"Amount at risk" is a financial term typically used to indicate differences in monetary amounts for a life insurance policy. Usually, it is the amount a life insurance beneficiary will receive upon the death of the insured party minus the amount of current cash value. The term also is sometimes applied to other types of insurance policies and takes into account the monetary amount of coverage the policy provides and the amount of loss it is possible for the person who holds the insurance to suffer. In such a case, the lesser of the two amounts is referred to as the amount at risk. Additionally, this term sometimes refers to the amount a business owner stands to lose on a business.

The financial term "amount at risk" is often used to refer to mathematical calculations involving life insurance. For instance, this term is often used to calculate the amount left when subtracting the cash value a person has in a life insurance policy from the total amount of money his beneficiaries would receive upon his death. For example, if an individual has a policy worth $500,000 US Dollars (USD), his beneficiaries can expect to receive this amount if he dies while the policy is valid. If the same policy has a current cash value of $100,000 USD, one must subtract this amount from the coverage amount to get the amount at risk. In this case, the calculated amount would be $400,000 USD.

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In addition to its application to permanent life insurance, amount at risk comes into play in property insurance, which covers physical property, and liability insurance, which covers a person or business in the event of a lawsuit over injury or negligence. In this case, the calculation is handled a little differently. The amount at risk in such a case is actually the lower number when comparing the total amount of coverage an insured party has and the maximum amount of loss he could suffer. For example, if the policy limit is $500,000 USD and the maximum loss amount is $800,000 USD, then $500,000 USD amount is the amount of money at risk.

This term is sometimes even applied to businesses. In such a case, a business owner’s amount at risk is equal to the amount of money he has invested in his businesses. This means a person who has contributed $250,000 USD to his business is risking $250,000.

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