Mortality Charges

 

Life insurance is a contract between an individual and an insurance company, in which the individual pays a premium in exchange for a death benefit that will be paid to a designated beneficiary upon the individual's death. ULIPs, unlike regular life insurance plans, also come with an element of investment. When you purchase a ULIP, your premiums are invested into market-linked funds that have the potential to grow over time as per market interest rates.

However, ULIPs are still life insurance products, and that means that you also get a life cover element to secure your family in case of your death. To cover for the risk of your death, ULIPs have a ‘mortality charge’ that is deducted regularly from your fund value.

What are Mortality Charges?

Mortality charge is a fee that is usually associated with Unit-Linked Insurance Plans (ULIPs). As stated above, ULIPs offer dual benefits – investment and insurance. Your money is invested in the funds of your choice each time you pay your premiums. This money is pooled into your policy’s ‘fund value’, which is the total amount of money your plan has accrued over the course of your policy term. Fund value includes the premiums paid as well as the interest you have earned via your fund’s rate of returns.

Mortality charges are always deducted from your total fund value. The amount and frequency of mortality charges varies as per your policy’s terms and conditions. Mortality charges are deducted by the insurance company to cover for the risk of your death. Basically, mortality charges are the fee you pay to secure your life insurance death benefit.

In other words, mortality charges are like the premium paid for a term insurance. But unlike term insurance, where all your premiums go towards your death benefit, in ULIPs, only a small part of your fund value is deducted.

Are Mortality Charges Fixed?

It's important to note that mortality charges are not fixed and can change over time. As individuals age, their mortality charges will typically increase. This is because the risk of death increases as individuals get older. Additionally, if an individual's health or lifestyle changes, their mortality charges may also change.

Calculation of Mortality Charges in ULIPs

Your monthly mortality charges are calculated using the formula given below:

Mortality Rate x Sum at Risk / 1000 x 12

Where;

Mortality rate is the fixed rate for a given age group based on their risk of death.

Sum at risk is the amount of money the insurer has assured as life cover.

Your mortality rate will depend on your age group. You can find the current value of your mortality rate by referring to the ‘Mortality Table’ provided by your insurer.

Example

To best understand how mortality charges are calculated, let’s take the example of a 35-year-old man who has purchased Edelweiss Life- Wealth Plus for a sum assured for ₹5 lakhs.

By checking the mortality table for Edelweiss Life- Wealth Plus, we can find out that the mortality rate for a 35-year-old (male) is 1.650.

Hence, using the formula shared above, we can calculate the man’s exact monthly mortality charges:

Mortality charges = Mortality Rate x Sum at Risk / 1000 x 12

Mortality charges = 1.650 x 5,00,000 / 1000 x 12

= 825000 / 12000 = 68.75

The monthly mortality charges deducted from the fund value will be ₹68.75.

What are the Factors That Affect Mortality Charges?

Mortality charges are determined by several factors, including the individual's age, gender, health, and lifestyle. Generally, the younger and healthier the individual, the lower the mortality charge. This is because younger and healthier individuals are less likely to die, and therefore, less of a risk for the insurance company.

Gender also plays a role in determining mortality charges. On average, women tend to live longer than men, so they typically have lower mortality charges. However, this may vary depending on the insurance company's underwriting guidelines.

Health is another important factor that can affect mortality charges. Individuals with pre-existing health conditions or those who engage in risky behaviours, such as smoking or excessive alcohol consumption, may have higher mortality charges. This is because these individuals are considered to be at a higher risk of death, and therefore, more expensive to insure.

Lifestyle can also play a role in determining mortality charges. For example, individuals who engage in dangerous hobbies, such as skydiving or rock climbing, may have higher mortality charges than those who do not.

In addition to these factors, the type of life insurance policy  also affects mortality charges. For example, term life insurance policies typically have lower mortality charges than whole life insurance policies, because they only provide coverage for a specific period of time. Whole life insurance policies, on the other hand, provide coverage for the entire lifetime of the individual, which makes them more expensive.

How Can You lower your Mortality Charges in ULIP?

Investing in a ULIP at a young age can lower the mortality charge, as well as providing more time for compounding to maximize returns. This is a beneficial situation for the investor. Waiting to invest in a ULIP results in higher mortality charges and a shorter investment period.

In conclusion, mortality charges are an important aspect of life insurance. They are determined by several factors, including the individual's age, gender, health, and lifestyle. It's important to consider these factors when purchasing life insurance, as they can affect the cost of the policy. It's also important to keep in mind that mortality charges are not fixed and can change over time. It's always a good idea to review and compare policies from different insurance companies to find the best coverage at the most affordable rate.

FAQs

Do mortality charges change over time?

Yes, mortality charges can increase over time as a person grows older. This is because the risk of death increases as a person ages.

Can mortality charges be avoided in ULIPs?

No, mortality charges are mandatory as they go towards providing your ULIPs life cover element.

Do mortality charges impact investment returns in ULIPs?

Since mortality charges are directly deducted from your fund value, they will impact your returns.

Do mortality charges in ULIPs impact the surrender value?

Yes, mortality charges impact the surrender value. Surrender value for ULIPs is determined by your fund value. And since mortality charges are deducted from the fund value, this means that your overall surrender value is also being deducted.  

Can I Negotiate Mortality Charges?

No, the mortality rate for a specific age group is fixed, and these rates are approved by the IRDAI.

 

Aastha Mestry - Portfolio Manager 

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.