Life insurance: What are mortality charges?

Quite often you hear your insurance advisor talking about mortality charges in your life insurance. But what is the meaning of mortality charges? How are they computed and as a policy holder does it give any benefit to you? What should you know to save on mortality charges?

What are mortality charges?

Whenever you buy a life insurance policy, the company offering it will levy a charge for the insurance protection upon death and to cover certain other expenses. In a nutshell this is the actual cost of insurance. Technically called mortality charge, this is deducted usually every month from your policy's account value. While the insurance company can tweak these charges from time to time it cannot exceed the maximum limit as specified in the policy.

How are they computed?

Life Insurance Corporation the oldest life insurance company operating in India has a table of charges in place and most insurance companies follow this. However, some private insurance companies have their own set of table for calculating mortality charges. But how are mortality charges computed?

Generally, there are three things that are taken into consideration in determining the mortality charges: One, the net amount at risk under the policy; two, the risk classification of the policy holder; and three, the attained age of the policy holder.

The major chunk of the premium is invested in a savings fund and returned to the policy holder at the time of maturity and to the nominee when the policy holder dies.

Relation between mortality charges and your age

Do you benefit from reduced mortality charges if you buy a life insurance at a young age? The answer is yes based on the simple logic that higher the age higher is the mortality charges. For example, a 25 year old will obviously have a higher life expectancy than a 55 year old and hence will get lower mortality charges if he buys a life insurance.

Scientific and medical advancement has meant higher life expectancy for the average Indian. On the flip side this has meant a higher cost when it comes to buying whole-life annuities that will help you get regular income for a specified time upon payment of a lump sum amount. Early birds get more benefit, so go for a life insurance cover at an early age to save on mortality charges.

And if you are one of those wanting to invest in pension plans, at least two-thirds of your accumulated sum will be required to buy annuities to save tax.

Recent developments

In August 2009, the Insurance Regulatory and Development Authority had asked life insurance companies to stop levying any charge on customers if the policy is surrendered from the fifth year besides withdrawing the mortality charges from the overall cap on the charges levied by unit-linked insurance plans or ULIPs.

However, this step has been seen by experts as a move that will benefit both the customers and the insurers. The policy holder will be benefited by this if he wishes to take higher life cover while buying ULIPs. Insurance companies stand to gain too as this would give more freedom to increase administration charges.