Mortality Charges in ULIPs - How Are They Calculated?

 

In this policy, the investment risks in the investment portfolio is borne by the policyholder

Combining the dual advantages of life insurance and an investment avenue, the Unit Linked Insurance Plans (ULIP) pay the sum assured as a death benefit to the nominee if the policyholder dies an untimely death. The death of a policyholder can occur at any time within the policy term. Thus, paying the sum assured becomes a risk for the insurance company as they have to pay for the amount despite the fact that the premiums are not paid for the full schedule. To cover this risk, the insurer levies a fee which is termed a mortality charge. However, not just ULIP, this charge is deductible in every life insurance policy. 

• What is the mortality charge in ULIP?

Mortality charge in ULIP refers to the charge levied by the insurer to cover the risk of paying the sum assured along with other expenses. Usually, this is deducted before the policyholder’s money is invested. 

Before you decide to invest in ULIP, it’s important to understand what the mortality charges are for better clarity of the process. 

In the case of ULIPs, a part of the premium forms the life cover while the remaining portion is invested in a chosen portfolio of market-linked funds to fetch returns. The life cover or the sum assured is payable in the event of the policyholder’s unfortunate demise within the policy term. Alternately, if he/she survives through the term, the total fund value is paid upon maturity of the policy. 

So, in the event of the unforeseen, the insurance company needs to pay the sum of risk = (sum assured-fund value) out of its pocket. Mortality charges are deducted to compensate the insurer for the loss of this amount. 

• How is the mortality charge in ULIP calculated?

Aimed to cover the risk of the insurer, the mortality charge in ULIP is calculated per Rs 1000 of the sum assured or the sum at risk per annum. 

The monthly mortality charge is therefore calculated by the following formula:

Mortality charge = (Mortality rate at the specific age x Sum at risk)/ (1000x12)

Here the mortality rate is picked up from the mortality rate data provided by the revised Indian Assured Life Mortality Table published by the Institute of Actuaries of India and is mandated by the Insurance Regulatory and Development Authority of India (IRDAI) in the calculation of mortality charges. 

Also, the sum of risk varies across Type I and Type II of ULIP. In the case of type I ULIP, the death benefit is payable as the higher of the sum assured and fund value. Hence, the higher the fund value, the lower the sum of risk. Whereas in type II ULIP, the death benefit is the total sum assured and fund value. Thus, the sum assured here becomes the sum at risk and remains constant. 

• Factors affecting mortality charges

Besides the mortality rate and the sum of risk, there are certain other determinants of the mortality charge. These are age, gender, occupation, living location, health and financial status of the policyholder and the life expectancy ratio of the country of living. These factors are taken into account while calculating the mortality charge as they affect the life expectancy or the probability of death of the policyholder. For example, being employed in a hazardous job exposes you to a bigger risk of death, pulling up the mortality charge in turn. 

• Cases where mortality charge is high or low in ULIP

Typically, the mortality charge in ULIP is lower when the policyholder is young and with no or negligible health complications and vice versa. This is because the mortality rate is lower in the case of youngsters. However, the same is not applicable for the age bracket 7-14 which has a higher mortality rate. Hence the mortality charge deductible is also high.   

In another instance, female policyholders are considered to have higher life expectancy compared to males and thus pay lower mortality charges. By norm, the mortality charge for females is estimated on a 3-year setback, relative to their male counterparts. So, the mortality charges payable by a 30-year-old is similar to that of a 27-year-old male. 

• Mental Peace: Return of Mortality charges

Mortality charges are deducted in the initial phase of the ULIP policy before the money gets invested. But what if the policyholder lives through the policy term? Is the risk cover for the insurer a loss for the policyholder? The answer is no if you purchase a ULIP with the Return of Mortality Charges feature. Here the mortality charges paid by the insured are returned after the policy term is over as a part of the maturity benefit. 

• However, to get this benefit the policyholder needs to fulfil the following criteria:

• The policyholder survives through the policy term up to its maturity. 

• All the premiums have been paid in due course.

• The policy has not been surrendered. 

You can therefore always choose to buy the RoMC variant of your ULIP plan. Isn’t it a comforting thought that you will get back the money you’ve paid to cover the insurer’s risk?

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ARN - ED/01/24/8104