Mortality Charge in ULIP: Definition, Effect and How to calculate

While taking an investment through a Unit Linked Insurance Plan (ULIP), there are several charges associated with the scheme that should be known to the investor. One such charge is the Mortality Charge in a ULIP, which indicates how expensive it is to compensate for the loss of life under the policies in place. In order for the user to gain more information on ULIPs, this article explains what mortality charges mean, how they are calculated and subtracted, as well as what affects their calculation.

What are Mortality Charges in ULIP?

Let’s understand what mortality charges in ULIP are. It's simply what the insurance company deducts as charges for providing you with life cover in a ULIP policy. Since ULIP is both an investment product and an insurance product, a portion of your payment is invested in life insurance, and the rest is channeled into market-linked funds.ULIPs are one of the many life insurance options available to investors, each offering a different combination of protection and wealth creation benefits.

The mortality charge depends on the probability of the insurance company making a death benefit payout. It varies on the basis of the age of the policyholder, the health of the policyholder, and the amount at risk. Usually, the fee is deducted from your investment fund every month in the form of unit withdrawals.

Why are Mortality Charges Levied?

While some of the ULIP schemes charge mortality fees as they provide for your family's expenses at the time of your death, along with investments, the death benefit is payable to the nominee as per the policy terms upon the death of the life assured during the policy term. Mortality charges are only one component of the overall cost structure, and investors should also understand the various charges in a life insurance policy before purchasing a ULIP.The fund management fee is used as a way of monitoring the performance of the investment, while the mortality charges affect the insurance portion only. 

Mortality charges are deducted monthly from the fund value of the policyholder by cancelling the units. The probability that the insurer will pay out the death benefit becomes more likely as the insured ages, since their likelihood of dying increases. Understanding these charges is important in identifying the advantages of ULIPs in regard to investments and security.

How are Mortality Charges Calculated in ULIP?

Many investors ask how mortality charges are calculated in ULIP. 

Annual Mortality Charge = (Mortality Rate × Sum at Risk) ÷ 1,000 

In most cases, the yearly payment will be divided into 12 monthly installments of equal value.

• The Mortality Rate in this case depends on the age and level of risk of the insured individual.
• Sum at Risk is the amount of money the insurance company could lose, and it changes based on the type of ULIP. 

A simplified illustration of the annual mortality charge is:

Sum at Risk: ₹10,00,000

Mortality Rate = ₹1.50 per ₹1,000 Sum at Risk

Mortality fees per year = (1.50 x 10,000,000) ÷ 1,000 = ₹1,500

Monthly fees are = ₹125

The precise figure may vary based on the insurer and the manner in which the policy is formulated.

How to Calculate Mortality Charges in ULIP?

The methods employed in determining ULIP mortality charges can be illustrated through an example:

Assuming:

Agreed Sum = ₹20 lakhs

Value of the fund currently = ₹5 lakhs

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Mortality Rate = ₹1.20 per ₹1,000 Sum at Risk

Difference between promised sum and fund value = ₹20 lakhs - ₹5 lakhs = ₹15 lakhs

Mortality charge per year: (1.20 x 15,000,000) / 1000 = ₹1,800

Charge to be debited each month = 1,800/12 = 150. One will receive this sum in the form of surrendered ULIP units.

Note: This illustration assumes a Type I ULIP.

How are Mortality Charges Deducted in ULIP?

A common question is how mortality charges are deducted in ULIP.

Mortality charges are usually deducted by cancellation of units from the fund value at periodic intervals, as specified in the policy. As a result:

• The number of units in the fund is reduced.
• Your investment pool has thus been reduced by a small margin.
• This may have some effect on compounding in the future.

Policyholders should review the benefit illustration and policy schedule to get clarity on all of the above deductions.

Factors That Affect Mortality Charges in ULIP

Certain factors affect the Mortality Charges in a ULIP.

• Age: The cost of death increases with age because the risk of mortality is related to it.
• Sum at Risk: If the sum at risk is more, it is expected that there would be a loss to the insurer, which would require an increase in mortality charges.
• ULIP Type: The amount at risk in Type I ULIP decreases as the fund value increases. However, in Type II, ULIPs may have higher mortality charges because the insurer's risk exposure generally remains higher
• Health & Lifestyle: Your health condition, medical history, habits, lifestyle, and occupation can influence the cost of underwriting and death. (subject to the underwriting practices of the insurer).
• Policy Design: Death benefits formulated differently by various insurers would influence the risk covered by the policy or the amount at risk, and hence the mortality charges applicable.

How Do Mortality Charges Impact ULIP Returns?

At first, the mortality charges might not seem to be much of a concern, but these charges are typically deducted from the fund value at regular intervals. 

These charges will bring down: 

• The amount that can be invested. 
• The small growth of long-term wealth. 
• The compounding effect due to the cancellation of monthly units. 

But still, these policies provide the facility of life insurance, which is one of the many important functions of the ULIP.

Can You Reduce Mortality Charges?

Even though one cannot control the mortality rate, it is possible to maintain it at lower levels through such means as:

• Buying early may help secure lower mortality rates at entry, which can also contribute to lower overall policy costs throughout the policy term.
• Existing mortality charges generally follow the policy schedule.
• Choosing adequate coverage
• Comparing different ULIP policies before buying

The analysis of the policy snapshot will make you aware of all the associated charges before purchasing the policy.

Before investing in a ULIP (Unit Linked Insurance Plan), you must be aware of the Mortality Charges in ULIP. Mortality charges represent the cost of life insurance coverage and are deducted from the fund value as specified in the policy.

By understanding the concept of mortality charges in ULIPs, including the calculation and deduction process, investors can make better decisions in this regard.

Refer to the policy brochure, benefit illustration, and charge structure regularly so as to develop an idea of the impact of various deductions on the long-term returns.