Posted in Finance, Accounting and Economics Terms, Total Reads: 265
Definition: Mortality and Expense Risk Charge
Mortality and expense risk charge is a cost borne by the insurers under variable annuity plan. It is also referred as ‘M&E’ fee. This amount is charged by the insurance companies to cover certain part of the risk that they cover through providing such life options or other benefits. According to the US law, this charge is approximately 1.25% of the total account value of the insurer payable each year. For example: if the total account value of any insurer is $ 50,000, then for that particular year he needs to pay $ 725 as mortality and expense risk charge to the insurance company.
However, the percentage of this amount generally lies in the range of .40% to 1.75%. This type of fee is only applicable on the funds kept under this account and not on various other types of general account. Sometimes, the profits that these companies are able to generate through these charges are used to cover the selling costs that they incur in order to acquire the customer in the form of commissions to the selling agent or any other agency involved in the business of selling this kind of annuities. Hence, this covers the ‘expense’ portion of this charge.
This charge is also used to cover the ‘mortality’ portion of the risk borne by the insurance company. This kind of risk arises when the insurer dies early and in return the insurance company needs to provide the compensation amount or some other predefined amount to the family of the insured. In this case the amount that the insurance company pays in the form of compensation exceeds the amount that it charged from the insurer through the premium during his lifetime. Mostly, this kind of expense is charged by the insurance companies on an annualized basis.