Mortality Charges in ULIP

Mortality charges are a major consideration for investors investing in ULIPs^#. The mortality rate figures are specified by the Insurance Regulatory and Development Authority of India (IRDAI), which is used for calculating the charge. These charges are designed to cover the expenses associated with mortality insurance, a fundamental component of ULIPs^#. This blog explains what is mortality charges in ULIPs^#. 

Mortality Charges Meaning

The cost paid by the insurer to provide life cover is called the mortality charge. The life cover you get helps ensure that your loved ones are financially secure in case of an unfortunate demise. When a person invests in a ULIP^#, the insurance company charges a fee for providing life insurance coverage in case of their death and to address various associated costs. This fee, commonly referred to as the mortality charge, is usually deducted, along with other fees, from the policyholder's invested funds. Additionally, mortality charges increase with age, so invest early to get lower mortality charges.

How are Mortality Charges Calculated?

Various factors determine the mortality charges that you pay, such as your age, gender, health condition, and the sum assured you choose. Similar to term insurance plans, purchasing a ULIP^# at a younger age can result in lower mortality charges, which rise significantly as you grow older. Insurers calculate mortality charges by evaluating the mortality rate and the coverage risk. The risk cover represents the life cover amount that the insurer provides to your nominee if an unfortunate death occurs during the policy period. This is referred to as the sum at risk, calculated as the gap between the death benefit and the existing fund value.
 

Additionally, your current age determines the mortality rate. As people get older, they face higher chances of health issues and illnesses, making age a crucial factor for insurers when assessing the risk of providing life coverage.
 

Here is an example to help you understand the calculation process.


Consider a scenario where a 30-year-old person wants to create wealth. He chooses to invest in a ULIP^# with a premium of ₹1.5 lakh and gets a life cover of ₹15 lakh.

Step 1: Identify the mortality rate for age 30. Let us assume that the mortality rate is 1.02.

Step 2: Determine the sum at risk. If the sum assured for a ULIP^# is ₹15 lakh and the fund value is minimal (being a new policy), the sum at risk is approximately ₹15 lakh.

Step 3: Apply the formula: Monthly Mortality Charge = (1.02 × 15,00,000/1000) × 1/12 = ₹127.50.


In this scenario, the monthly mortality charge for the ULIP^# would be ₹127.50. Moreover, the mortality charges keep reducing over time as your fund value increases. In simpler terms, the policy's fund value grows with time, resulting in a reduction in mortality charges.

Factors that Influence the Mortality Charges

Various factors influence mortality charges in ULIPs^#, and understanding these factors is essential for calculating them. Here is an overview of what these charges are based on:
 

• Age: Your age is directly linked to your mortality rate. Consequently, younger individuals typically incur lower mortality charges in ULIP^#.

• The amount of coverage: The extent of coverage also significantly impacts ULIP mortality charges calculation. A high coverage amount represents a significant risk for the insurer, leading to high mortality charges.

• Your overall health: Your overall health status plays a pivotal role in determining mortality charges in the ULIP^#. Good health reduces the insurer's mortality risk, resulting in more affordable mortality charges.

Considering these factors, insurance providers set a standardised annual mortality charges table. These charges are derived from average mortality rates based on age and health conditions among the general population.

How Can I Reduce the Mortality Charges?

Investing in a ULIP^# at a young age is an effective way to lower your mortality charges. Since ULIPs^# are long-term investments, starting early gives you more time to leverage the power of compounding on your returns². Purchasing a ULIP^# at a later stage leads to higher mortality charges and a shorter investment period.
 

Here are some common ways to reduce mortality charges.

1. Reduced Sum Assured

   The sum assured signifies the insurance coverage provided by the ULIP^# plan. Higher sum assured amounts correspond to increased mortality charges.
    

   Thus, one effective method to reduce mortality charges is to select a lower sum assured. However, you should ensure that the chosen sum assured adequately meets your needs.  
    

2. Opt for a Prolonged Policy Term

   The policy term refers to the duration of the ULIP^#. Extending the policy term results in decreased mortality charges. Therefore, opt for a longer policy term to reduce mortality charges.
    

3. Evaluate Policies Across Different Insurers

   Mortality charges can vary among insurers. Hence, you must compare ULIP policies from various insurers to identify the one with the lowest mortality charges. 
    

   This can be done through online research, consultation with a financial advisor, or comparing different insurers and aggregator websites.
    

4. Consider a Term Insurance Policy

   Term insurance plans offer pure insurance coverage without the need for an investment component. Moreover, mortality charges associated with term insurance policies are generally lower than those of ULIPs^#.
    

   Therefore, if your primary goal is insurance coverage, opting for a term insurance policy may be a more favourable choice.

Conclusion

Mortality charges represent fees imposed by the insurance company to secure the policyholder's life protection. It depends on your age, overall health, and the amount of coverage. You can usually opt to maintain a ULIP^# policy for an extended duration to reap the market-linked returns². Tata AIA ULIP plan provides a diverse range of investment choices with varying risk levels, like high, moderate, and low-risk options. You can select the suitable investment avenue from different fund options based on your risk tolerance. You can also use our online ULIP calculator to determine your expected returns and select a suitable plan.