Mortality and Expense Risk Fees
Annuity investments are designed to pay death or income benefits to the annuitants or beneficiaries for a number of years or the entire lifetime. There are negative and positive features that are carried along with variable annuities so it’s very important to know and define all the charges since they can have a great impact on the annuitant’s balance and payouts in the future. There are several charges associated with having annuity investments such as surrender charges, administrative fee, sales and transfer charges. And one of the charges that policyholders may pay under variable annuity is the mortality and expense risk fees.
Mortality and expense risk fees are charges included in variable annuity contract which are intended to pay for different kinds of risks assumed by insurance providers under the contract. This fee is paid to the insurance company for the risks they take in providing the annuity contract to its policyholders. These risks include uncertain events that are likely to occur or factors such as the life expectancy of the annuitant. Mortality and expense risk charge is a fee to compensate additional risk of death. If a person purchases the insurance policy at the age of 40, the insurance company will likely add the fee on the annuity contract. Insurance companies however do not offer policies for someone at the age or 90 and are unlikely to add mortality and expense risk charge if the person has good health conditions at the age of 25. The insurance company provides security and peace of mind to their clients by offering a selection of lifetime payout as well as the fixed insurance premiums. An insurance provider, if in case the annuity covers the policyholder’s lifetime, must guarantee payment and embrace the possibility or risk that the annuitant may live pretty much longer than anticipated.
This annuity charge is changeable and counterbalances the level of risks carried by people of different situations. Insurance providers consistently assess and evaluation different levels of risk prior to concluding any annuity contract. These risks are priced based on the structure of the annuity contract and the personal situation of the annuitant. The insurance provider guarantees that the policyholder’s beneficiary will receive the total purchase payments in the event that the annuitant dies prior to receiving his or her distributions.
The mortality and expense risk fees should be equal to a particular percentage of the annuitant’s account value which normally in the rate of 1.25% per year. This charge should cover the insurance risks under the annuity contract. The insurance companies sometimes use the profit from the fees to pay the policyholder’s expenses of selling the variable annuity. If for example the annuitant, under his variable annuity contract has a mortality and expense charge at the rate of 1.25% of account value per year and has $30,000 average account value, she or he will pay $375 mortality and expense risk fee covering the entire year. The fees are charged annually by the insurance company to insure any loss.