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Understanding Mortality Charges in ULIPs

When investing in Unit Linked Insurance Plans (ULIPs), understanding mortality charges is crucial for making informed decisions. These charges, deducted to cover the insurer's risk of paying death benefits, significantly impact your policy's returns. This article explains how mortality charges work, how they're calculated, and introduces the beneficial Return of Mortality Charges (RoMC) feature that can help maximize your policy's value.

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Mortality Charges in ULIPs - How Are They Calculated?

Mortality Charges in ULIPs
February 09, 2024

Table of Content

 

In this policy, the investment risks in the investment portfolio is borne by the policyholder

Combining the dual advantages of life insurance and an investment avenue, the Unit Linked Insurance Plans (ULIP) pay the sum assured as a death benefit to the nominee if the policyholder dies an untimely death. The death of a policyholder can occur at any time within the policy term. Thus, paying the sum assured becomes a risk for the insurance company as they have to pay for the amount despite the fact that the premiums are not paid for the full schedule. To cover this risk, the insurer levies a fee which is termed a mortality charge. However, not just ULIP, this charge is deductible in every life insurance policy. 

  • What is the mortality charge in ULIP?

Mortality charge in ULIP refers to the charge levied by the insurer to cover the risk of paying the sum assured along with other expenses. Usually, this is deducted before the policyholder’s money is invested. 

Before you decide to invest in ULIP, it’s important to understand what the mortality charges are for better clarity of the process. 

In the case of ULIPs, a part of the premium forms the life cover while the remaining portion is invested in a chosen portfolio of market-linked funds to fetch returns. The life cover or the sum assured is payable in the event of the policyholder’s unfortunate demise within the policy term. Alternately, if he/she survives through the term, the total fund value is paid upon maturity of the policy. 

So, in the event of the unforeseen, the insurance company needs to pay the sum of risk = (sum assured-fund value) out of its pocket. Mortality charges are deducted to compensate the insurer for the loss of this amount. 

  • How is the mortality charge in ULIP calculated?

Aimed to cover the risk of the insurer, the mortality charge in ULIP is calculated per Rs 1000 of the sum assured or the sum at risk per annum. 

The monthly mortality charge is therefore calculated by the following formula:

Mortality charge = (Mortality rate at the specific age x Sum at risk)/ (1000x12)

Here the mortality rate is picked up from the mortality rate data provided by the revised Indian Assured Life Mortality Table published by the Institute of Actuaries of India and is mandated by the Insurance Regulatory and Development Authority of India (IRDAI) in the calculation of mortality charges. 

Also, the sum of risk varies across Type I and Type II of ULIP. In the case of type I ULIP, the death benefit is payable as the higher of the sum assured and fund value. Hence, the higher the fund value, the lower the sum of risk. Whereas in type II ULIP, the death benefit is the total sum assured and fund value. Thus, the sum assured here becomes the sum at risk and remains constant. 

  • Factors affecting mortality charges

Besides the mortality rate and the sum of risk, there are certain other determinants of the mortality charge. These are age, gender, occupation, living location, health and financial status of the policyholder and the life expectancy ratio of the country of living. These factors are taken into account while calculating the mortality charge as they affect the life expectancy or the probability of death of the policyholder. For example, being employed in a hazardous job exposes you to a bigger risk of death, pulling up the mortality charge in turn. 

  • Cases where mortality charge is high or low in ULIP

Typically, the mortality charge in ULIP is lower when the policyholder is young and with no or negligible health complications and vice versa. This is because the mortality rate is lower in the case of youngsters. However, the same is not applicable for the age bracket 7-14 which has a higher mortality rate. Hence the mortality charge deductible is also high.   

In another instance, female policyholders are considered to have higher life expectancy compared to males and thus pay lower mortality charges. By norm, the mortality charge for females is estimated on a 3-year setback, relative to their male counterparts. So, the mortality charges payable by a 30-year-old is similar to that of a 27-year-old male. 

  • Mental Peace: Return of Mortality charges

Mortality charges are deducted in the initial phase of the ULIP policy before the money gets invested. But what if the policyholder lives through the policy term? Is the risk cover for the insurer a loss for the policyholder? The answer is no if you purchase a ULIP with the Return of Mortality Charges feature. Here the mortality charges paid by the insured are returned after the policy term is over as a part of the maturity benefit. 

  • However, to get this benefit the policyholder needs to fulfil the following criteria:

  • The policyholder survives through the policy term up to its maturity. 

  • All the premiums have been paid in due course.

  • The policy has not been surrendered. 

You can therefore always choose to buy the RoMC variant of your ULIP plan. Isn’t it a comforting thought that you will get back the money you’ve paid to cover the insurer’s risk?

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.   

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, The name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. 

18. Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime.

** The past 5 year fund performance of HDFC Life Discovery Fund (SFIN: ULIF06618/01/18DiscvryFnd101) as on 30th November 2024. The benchmark taken into consideration here is is Nifty Mid Cap 100 which as a return of 26.77% as on 30th November 2024. HDFC Life Discovery Fund is available with HDFC Life ULIPs which comes with a life cover. Please note past fund performance is not indicative of future performance.

ARN - ED/01/24/8104

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