Mortality Charges in ULIPs

Table of Content

1. What are Mortality Charges in ULIP?

2.Factors Affecting Mortality Charges in ULIP

3. How is the mortality charge in ULIP calculated?

4.Eligibility Criteria for Return of Mortality Charges (RoMC)

5.Mental Peace: Return of Mortality charges

6. Conclusion

7. FAQs on Mortality Charges in ULIP

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 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 are Mortality Charges in ULIP?

In ULIP, every premium you pay serves two purposes: part of it is invested in market-linked funds, and part goes toward providing life cover. The cost of that life cover is known as the mortality charge. Think of it as a minor charge the insurer deducts on a regular basis to cover the risk of paying your sum assured (i.e., the assured amount your nominee gets if something happens to you).

Here is how it functions: the insurer computes this charge based on the sum at risk. This is the difference between your sum assured and the current fund value. For instance, if your policy’s sum assured equals ₹10 lakh and your fund value equals ₹3 lakh, the insurer’s risk is ₹7 lakh, and the mortality charge is applied to that amount.

Because such charges are deducted from your premium, higher mortality charges mean a smaller portion of your premium is left for investment purposes. That is why knowing them assists you in comparing ULIPs better and choosing the right one that balances protection and growth in a prudent way.

This mortality table serves as the industry standard for pricing risk in ULIPs, ensuring fair and accurate charge determination based on age and other risk factors.

• Factors Affecting Mortality Charges in ULIP

Mortality charges in a ULIP are personalised and vary based on individual risk factors. They differ based on various factors that affect the insurer's risk and the likelihood of paying the death benefit, such as the sum at risk, mortality rates, and personal or policy-specific characteristics.

• Age

Mortality charges usually rise with age as the probability of death increases over time. Younger policyholders enjoy lower charges, which makes age an essential factor in deciding life cover costs.

• Gender

Life expectancy differences mean males and females witness different mortality charges. Typically, females have lower charges because they statistically live longer, which insurers factor into pricing.

• Health Status

Your present health condition and medical history play a significant role. Individuals with chronic illnesses or any prevailing conditions generally witness higher charges. However, healthier policyholders benefit from lower costs.

• Lifestyle & Habits

Unhealthy habits like smoking, excessive alcohol consumption or risky behaviour increase mortality charges. This is because insurers account for the higher likelihood of health complexities or early death.

• Occupation & Risk Exposure

Jobs with higher risk, namely construction or mining, result in higher mortality charges. The potential liability of the insurer increases owing to the chance of accidental death in such professions.

This approach ensures that charges show individual risk fairly while safeguarding the policyholder and insurer.

• How is the mortality charge in ULIP calculated?

In a ULIP, a part of your premium is deducted as a mortality charge to cover the risk of the insurer paying your death benefit. The computation basically depends on the sum at risk and the mortality rate for your age.

The sum at risk is the difference between your sum assured and the present fund value. To put it in simple words, it represents the amount the insurer is exposed to if something happens to you. The formula used is:

Mortality charge = (Mortality rate × Sum at risk) ÷ (1000 × 12)

Here is a practical example: Suppose a 35-year-old policyholder holds a ULIP with a sum assured equal to ₹20 lakh, and the mortality rate is 1.29 per 1,000. If the present fund value is ₹5 lakh, then the sum at risk is ₹15 lakh.

The month-on-month mortality charge would be: (1.29 × 15,00,000) ÷ (1000 × 12) = ₹1,612.50 per month

It's important to note that ULIP types affect the sum at risk. Type I ULIPs pay the higher of the fund value/sum assured, so the sum at risk falls as the fund grows. Type II ULIPs pay the sum assured plus fund value, which keeps the sum at risk more constant. This can lead to higher charges.

Being aware of this calculation assists you in anticipating fund growth, evaluating costs and comparing plans in a practical way, ensuring you make well-informed investment choices.

• Eligibility Criteria for Return of Mortality Charges (RoMC)

The RoMC feature in a ULIP permits policyholders to recover the mortality charges paid, provided certain conditions are abided by:

• Survive the Policy Term: You must remain alive till the end of the policy term, ensuring the risk period of the insurer is complete.

• Pay All Premiums: Timely payment of all premiums is required, as missed payments can void RoMC eligibility.

• Do Not Surrender the Policy: The policy must be active till maturity; early surrender disqualifies you from RoMC.

Example: If a policyholder makes payment of premiums on time for a 15-year ULIP and remains active until maturity, they can get back the total mortality charges paid over the years.

RoMC adds value by returning the charges initially paid to cover life cover risk, boosting the overall returns of your ULIP.

• Mental Peace: Return of Mortality charges

Mortality charges are deducted in the initial phase of a 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, particularly if you select from the right types of ULIP plans that offer the RoMC feature. In such plans, the mortality charges paid by the insured are returned towards the end of the policy term as part of the maturity benefit, which ensures you benefit from investment growth as well as life cover.

Conclusion

Mortality charges in a ULIP are deductions from your premium that cover the risk of the insurer paying the death benefit. Such charges vary depending on factors such as age, gender, health, lifestyle, the sum at risk, and the type of ULIP chosen.

Understanding how they are calculated helps you anticipate their impact on fund growth and overall returns. You can optimise charges by choosing the right time to invest in ULIP, maintaining good health, and selecting the most suitable ULIP variant.

Being aware of such aspects enables you to make well-informed decisions, maximise returns and pick a ULIP plan that is in line with your financial goals and protection needs.

FAQs on Mortality Charges in ULIP

Q. What is the mortality charge of ULIP?

The mortality charge in a ULIP is the fee deducted from your premium to cover the risk of the insurer paying the death benefit. It ensures your nominees get the sum assured in the scenario of your untimely death.

The charge is based on parameters such as your age, health, sum at risk and the type of ULIP plan, and it slightly reduces the portion of premium available for investment.

Q. How to calculate the mortality cost?

Mortality cost is computed using the sum at risk (sum assured minus current fund value) and the mortality rate for your age. It is deducted monthly from your premium to offer life cover.

Understanding this assists you in gauging how much of your premium goes toward protection versus investment, allowing informed comparisons between distinct ULIP plans.

Q. Are mortality charges refundable?

Yes. In the case of some ULIPs, mortality charges are refundable through the Return of Mortality Charges (RoMC) feature. To qualify for this, you must abide by certain conditions, i.e., you must survive the policy term, pay all premiums on time and not surrender the policy early.

This refund recovers the cost of life cover, enhancing your overall ULIP returns.

Q. What is the formula for calculating ULIP mortality charge?

The standard formula is:

Mortality Charge = (Mortality Rate × Sum at Risk) ÷ (1000 × 12)

Here, the sum at risk is the difference between the sum assured and the current fund value. Note that the mortality rate is based on your age. This formula assists in determining the monthly deduction for life cover in a ULIP.

Q. What are the tax benefits of ULIP mortality charges under Section 80C?

Mortality charges paid as part of a ULIP premium qualify for ULIP tax benefits as per Section 80C*, up to the limit of ₹1.5 lakh per year. This means a portion of the life cover cost minimises your taxable income. This makes ULIPs a dual-benefit investment that offers both protection and wealth creation.

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