What are mortality charges in life insurance policy?

The real cost of insurance is charged by the insurer in the form of mortality charges. It’s a fee imposed by an insurance company against the life cover provided to the policyholder. This isn’t a fixed charge because it changes as you age. Mortality charges are primarily linked to the average life expectancy ratio, gender, financial status, geography and occupation of the policyholder. The Indian Assured Life Mortality Table 1994-96 prescribed by the Insurance Regulatory and Development Authority (IRDAI) is used by insurance companies to calculate this fee.

When your insurer offers a life cover which is essentially the sum assured payable to the nominee in case of death of the insured, it charges for this service in the form of a mortality fee. Thus, an amount is deducted from the fund value in the name of mortality charge.

Mortality charge is also known as the sum at risk. It is calculated per thousand of sum at risk. This means the higher the sum at risk, higher the mortality charge. The mortality rate (as on attained age) is per Rs 1,000 of the cover or the sum at risk. The formula to calculate mortality charge is as follows –

Mortality charge = mortality rate (for the attained age) x sum at risk/1000 x 1/12.

For pure term policies, these charges are deducted from the premium paid. On the other hand, for Unit Linked Insurance Policy (ULIP), equivalent units are cancelled from the savings fund.

Consider an example – A 30-year old individual buys a ULIP with an annual premium of Rs 1 lakh and a sum assured of Rs 10 lakh. If the person dies in the 4th year of purchasing the policy, the amount that can be claimed by the nominee is higher of the fund value that is expected to have grown to Rs 5.5 lakhs or sum assured of Rs 10 lakhs. Here, the nominee will get Rs 10 lakhs as the death benefit. Mortality charges are deducted to compensate for this risk of providing life cover that is borne by the insurer.

Many insurers also offer Return of Premium (ROP) policies. In accordance with the new feature, the insured gets back the mortality charge, which was deducted over the course of the policy term, during maturity. These charges are added to the fund value eventually. If the policy is not surrendered or discontinued and all the premiums have been paid on time, the policyholder can be confident of getting back the mortality deductions at the time of maturity.