Mortality Charges

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Definition:

Mortality charges in life insurance is the fee imposed by the insurance company in favour of the life protection of the policyholder.

Description:

Generally, mortality charges are involved with Unit Linked Insurance Policies. When an investor subscribes to a ULIP plan,plan the premium paid by them is divided into two parts. One part is dedicated to covering the life risk and the remaining part is invested in market-linked products for wealth creation. The former part includes the mortality charges to provide insurance protection upon the death of the policyholder.

When the investor pays the premium amount, mortality charges along with other charges are deducted by the insurance company before investing the policyholder’s money. The mortality charge is calculated on the basis of the sum at risk. The sum at risk is the sum assured on death minus the current fund value. The mortality charge decreases with increasing fund value. In simple words, the fund value of the policy increases with time causing the reduction of mortality charge.  Mortality charges make sure of the guaranteed1 financial assistance to the nominee in case of the policyholder’s unfortunate demise during the policy period. Monthly mortality charges of any ULIP plan can be calculated using the formula below:

Mortality charge= [Mortality rate (for attained age * Sum at Risk/1000] * 1/12

Mortality rate figures are prescribed by IRDAI and all life insurance companies use the same for the calculation of the charge.

Let us understand this with an example.

Example:

Let’s say Sarthak bought a ULIP policy at age 35. His Annual premium was ₹10,00,000 which resulted in a sum assured of ₹1Cr. As the policy is at a very initial stage the fund value is nearly zero. So the fund at risk is ₹1Cr. Now let us calculate the mortality charge every month he has to pay assuming the mortality rate as 0.15(at age 35).

Monthly mortality charge= [Mortality rate (for attained age) * Sum at Risk/1000] * 1/12

[0.15 * 1,00,00,000 / 1000] * 1/12 = ₹125

So the monthly mortality charge = ₹125

Amount of mortality charge component in the annual premium = ₹125 * 12 = ₹1,500

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