What is the Mortality Charge in ULIP?
The mortality charges in ULIP are fees imposed by the insurer to provide life insurance coverage as part of the policy. These charges are deducted regularly from your fund value and serve to cover the risk of paying the sum assured to your nominee in the event of your unfortunate demise during the policy term. In simpler terms, it is the cost of the life cover that ensures your family’s financial security if anything happens to you.
Simply put, when you ask what is mortality charges in ULIP, you are essentially asking about the price of protection embedded within your investment. These charges vary based on factors like age, health, and sum assured, and are typically lower when the policy is bought at a younger age. Since mortality in insurance directly affects the benefit payout, understanding this cost is essential before choosing a ULIP plan. To make sound financial decisions, it helps to first learn how ULIP works, especially how various charges like mortality fees can impact your overall returns.
How is mortality charge in ULIP calculated?
The mortality charge in ULIP plans is calculated based on a formula that takes into account the mortality rate and the sum at risk. The standard formula used by insurers is:
Monthly Mortality Charge = (Mortality Rate × Sum at Risk) / (1000 × 12)
Mortality Rate: This is derived from the Indian Assured Lives Mortality Table, regulated by the IRDAI and published by the Institute of Actuaries of India. It reflects the probability of death for a specific age group.
Sum at Risk: This refers to the amount the insurer would need to pay in case of the policyholder’s death. It differs by ULIP type:
Type I ULIP: Death benefit is the higher of the sum assured or the fund value. As the fund value grows, the sum at risk reduces.
Type II ULIP: Death benefit includes both the sum assured and the fund value. Hence, the sum at risk remains constant as the entire sum assured is always at risk.
Example:
Let us say Anika, a 30-year-old, has invested in a ULIP with a sum assured of ₹15 lakh. Her fund value currently stands at ₹6 lakh. Assuming the mortality rate for her age (30 years) is 0.000586 (as per the IALM 2012–15 table):
Sum at Risk (Type I ULIP) = ₹15,00,000 - ₹6,00,000 = ₹9,00,000
Monthly Mortality Charge = (0.000586 × 9,00,000) / (1000 × 12) = ₹0.44
Being aware of this charge is important as it affects the overall returns of your ULIP investment. The younger you start, the lower the charges, as mortality risk is lower at younger ages.
Factors Affecting Mortality Charges
Several factors determine the amount you pay as mortality charges in a ULIP policy. These include:
Age
One of the most significant influencers is age. Mortality charges are lower for younger individuals and increase with age due to higher health risks. Opting for a ULIP retirement plan at an early age helps keep mortality charges low and allows your investment to grow steadily over time.
Sum at Risk
This is calculated as the difference between the sum assured and the fund value. As your fund value grows over time, the sum at risk decreases (especially in Type I ULIPs), reducing the mortality charge.
ULIP Type
The type of ULIP you choose determines how the death benefit is calculated, which in turn affects the sum at risk and the corresponding mortality charges. Let us explore how the two main ULIP types influence this calculation:
- Type I ULIP: Offers the higher of the sum assured or fund value as the death benefit. Here, the sum at risk decreases as the fund value increases.
- Type II ULIP: Offers the sum assured plus fund value, so the sum at risk remains constant throughout the policy term.
Gender
Statistically, females have slightly lower mortality rates than males, so their mortality charges may be lower, except in some younger age groups.
Health Status
Healthier individuals are seen as lower risk, so they are charged lower mortality charges. Existing health issues can increase the cost.
Lifestyle Habits
Smokers or those with high-risk lifestyle habits (e.g., heavy drinking) may face higher mortality charges due to increased health risks.
Occupation and Location
Jobs with higher physical risk and residence in areas with poor health infrastructure or environmental hazards can also influence the insurer’s assessment of mortality risk.
Cases where Mortality Charge is High or Low in ULIP
Let us take a look at two contrasting examples to understand how factors such as age, health, lifestyle, gender, and sum assured directly impact the mortality charge and, in turn, the long-term growth of your ULIP investment:
Case 1: Lower Mortality Charges
Profile: Rhea, a 26-year-old non-smoker with no pre-existing health issues, purchases a 20-year ULIP with a sum assured of ₹40 lakh.
Why Charges Are Lower:
Young Age: Being in her 20s, Rhea is statistically at lower risk, resulting in a smaller mortality charge.
Healthy Lifestyle: Her good health and non-smoking status lower the insurer’s risk.
Female Advantage: Women typically have longer life expectancy, which can reduce the mortality rate applied.
Impact: A larger share of Rhea’s premium is directed toward investments, potentially leading to better fund growth, one of the key benefits of ULIP for young, healthy investors.
Case 2: Higher Mortality Charges
Profile: Arjun, a 52-year-old smoker with a history of hypertension, opts for a 10-year ULIP with a sum assured of ₹1 crore.
Why Charges Are Higher:
- Older Age: The risk of mortality increases with age, directly raising the charge.
- Health Conditions: Pre-existing illnesses like hypertension and a smoking habit increase the insurer’s liability.
- Higher Sum Assured: A larger life cover means a higher sum at risk.
Impact: A significant portion of Arjun’s premium goes toward covering the mortality cost, leaving less for market-linked investments.
FAQs on Mortality Charges in ULIPs
1
How are mortality charges calculated in a ULIP?
Mortality charges in a ULIP are calculated using the formula: (Mortality Rate × Sum at Risk) / (1000 × 12). The mortality rate is derived from official actuarial tables like the Indian Assured Lives Mortality Table. The sum at risk is the difference between the sum assured and the current fund value.
2
Are mortality charges deducted monthly or annually?
Most insurers deduct mortality charges on a monthly basis from the fund value. This deduction continues throughout the policy term as long as the life cover is active. During ULIP renewal, your insurer may reassess factors such as age and health, which can influence the updated mortality charges.
3
Do mortality charges in ULIPs vary with age?
Yes, they do. Mortality charges are age-dependent. Younger individuals generally have lower charges due to lower health risks, while charges increase as the policyholder ages.
4
Can mortality charges in ULIPs increase over time?
Yes, especially in ULIPs with yearly renewable term insurance structures. As you age, your mortality risk increases, and so does the charge. However, if your fund value increases significantly (in Type I ULIPs), the sum at risk can reduce, slightly offsetting the rise.
5
Are mortality charges fixed across all insurers?
No, they are not. While the mortality rate is based on standard tables, each insurer may have different pricing strategies or apply different underwriting criteria. Hence, mortality charges can vary from one insurer to another.
