Mortality Charges in ULIPs: What They Are and How They Work

Now that you are considering investing in the ULIP, do you know everything about this combination of insurance and investment plan?

If you are new to ULIPs, you might not know that there are multiple charges associated with them, and one of them is mortality charges. Deducted to cover the insurance company’s risk of paying to secure the policyholder’s life protection, mortality charges can impact the policy’s returns.

Understanding what mortality charges are and how they are calculated can help you choose the right unit linked insurance plans to invest in. So, delve in to learn everything necessary about mortality charges in ULIPs.

What is Mortality Charges in ULIP?

Mortality charges represent fees levied by the insurance companies for providing death benefits to the ULIP policyholders in case of their unfortunate demise.

Offering a dual benefit of life insurance and investment, ULIP plans pay the sum assured as a death benefit to the policyholder’s nominee if he dies an untimely death. A policyholder’s death can occur at any time, even within the policy term. In such a case, paying the sum assured can be risky for insurance companies because they might end up paying for the death benefit from their pocket even when premiums aren’t paid for the entire tenure.

Therefore, to cover this risk, the insurer imposes a fee, called mortality charges in ulip. These charges are usually deducted, along with other associated fees, from the funds policyholders invest in the ULIP policies, such as the Mera Wealth Plan.

What Factors Can Influence Mortality Charges?

You have understood the mortality charges meaning, but do you know these charges are not the same for each ULIP policyholder. Many factors can influence the amount imposed as mortality charges in unit linked insurance plans, and these are as follows:

• Your age: Your age directly impacts the amount of mortality charges for your ULIP policy. If you are younger, you will have to incur fewer mortality charges, but these charges can increase as you age.
• The amount of coverage: Another factor that can influence the calculation of ULIP mortality charges is the extent of coverage your plan provides. A ULIP policy providing higher coverage represents a greater risk for insurance companies. Hence, your mortality charges will be higher and vice-versa.
• Your health status: If your health is good, insurance companies will be less worried about your untimely demise, which reduces their mortality risk. As a result, you can buy ULIP plans for relatively more affordable mortality charges.
• Your lifestyle choices: Certain lifestyle choices, such as smoking, tobacco or alcohol consumption, can have a negative impact on your health. If you are habitual of these lifestyle choices, you might be offered ULIP plans with higher mortality charges.

How are Mortality Charges in ULIP Calculated?

Are you thinking about how insurers calculate the mortality charges in ulip? They calculate these charges by taking the mortality rate and the risk cover into account. The following mathematic formula is used as a standard to determine the monthly mortality charges for policyholders’ ULIP plans:

Mortality charge = [Mortality rate at the specific age x Sum at risk]/ (1000 x 12)

Insurers pick the mortality rate from the Institute of Actuaries of India's published mortality rate data specified by the revised Indian Assured Life Mortality Table and mandated by the IRDAI (Insurance Regulatory and Development Authority of India).

Furthermore, the sum at risk can vary across Type I and Type II of ULIP. When it comes to type I ULIP, insurance companies pay the death benefit as the higher of the sum assured and fund value. Therefore, the sum at risk is low when the fun value is higher.

And in the case of type II ULIP, the death benefit a policyholder receives is the total sum assured and fund value. Therefore, the sum assured in such ULIP policies becomes the sum at risk, which remains constant.

Example to Calculate Mortality Charges:

You can better understand how mortality charges are calculated with the help of the following example:

Let’s say a policyholder, ‘X,’ who is 25 years old, wants to build wealth and avail of coverage for life protection. Hence, he opts to invest in the ULIP plan with a premium of Rs. 1 lakh and seeks a life cover of Rs. 10 lakhs. And mortality rate for this ULIP plan and policyholder is 1.19.

What will be the mortality charges?

If the sum assured for the ULIP plan is 10 lakhs INR and the mortality rate is 1.19, then monthly mortality charges will be:

Mortality charge = [(1.19 x 10,00,000)/ (1000 x 12)] = Rs. 99.16

Therefore, in this example, the monthly mortality charges in the ULIP policy will be Rs. 99.16.

The Bottom Line

When buying a ULIP plan, you should be ready to pay mortality charges. These charges can substantially impact your investment returns, but you can reduce them. To do so, first, you should understand what is mortality charges, how they are calculated, and various strategies to diminish them.

Given the many charges associated with ULIP plans, you should opt for a prolonged policy term to avail of the market-linked returns and benefits while reducing charges. The PNB MetLife Ulip Plans offer a wide range of investment choices, meeting varied risk appetite, financial goals, and budgets.

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