Mortality And Expense Risk Charge

A mortality and expense risk charge is a variable annuity fee included in certain annuity or insurance products that compensates the insurance company for mortality risks and other various risks and expenses it assumes under the annuity contract.

A mortality and expense risk charge is calculated any time an insurance company offers an annuity to a client. To do so, it must make assumptions about uncertain factors (such as the life expectancy of the annuitant) and the likelihood of uncertain events actually occurring. It must also provide the annuitant with peace of mind via lifetime payout options for the future and fixed insurance premiums. The insurance company prices these risks inherent to the structure of an annuity as accurately as possible and packages it into a dollar value charge for the annuitant.

The reason for mortality and expense charges is to cover the cost of death benefits (the “mortality” portion) and the expenses of other insured income guarantees that might be included with the annuity contract. The mortality expense involves the risk of the contract holder dying while the account balance is less than the premiums that have been pain on the policy, less any withdrawals. The total of mortality and expense risk charges usually ranges from .40 to 1.75 percent per year, with an average of around 1.25 percent. Most insurers will annualize this expense and deduct it once per year. With variable annuities, the mortality and expense risk charge is only applied to funds held in the separate accounts, not funds held in the general account.

Generally, an underwriter will consider three factors in determining mortality and expense risk charges: the net amount at risk under the policy, the risk classification of the policyholder and the age of the policyholder. The insurance company will invest the largest chunk of a premium into a savings fund, and it will be returned to the policyholder at the time of maturity and to the nominee when the policyholder dies. 

If you purchase life insurance at a young age, you'll benefit from reduced mortality charges. This determination is based on the the simple logic that the older someone is, the more likely they are to die. For example, a 25-year-old will have a higher life expectancy than a 55-year-old, and, hence, the 25-year-old will benefit from lower mortality charges if he buys a life insurance policy.