Definition
A Mortality Charge is the cost an insurer deducts from a policyholder’s premium or fund value to cover the risk of death of the insured during a specific period.
- Primarily applies in life insurance and unit-linked insurance plans (ULIPs).
- Calculated based on the insured’s age, sum at risk, policy term, and mortality rate from standard mortality tables.
- In ULIPs, it is typically deducted monthly from the policy’s fund value.
- Higher for older ages or high-risk individuals due to greater probability of claim.
Formula (simplified):
Mortality Charge = (Sum at Risk × Mortality Rate) ÷ 1,000
Case Study
A 35-year-old man in Delhi purchased a ULIP with an annual premium of ₹50,000 and a life cover of ₹10 lakh. Each year, the insurer deducted a mortality charge from his fund value to cover the cost of providing the life cover. In the first policy year, based on his age and the insurer’s mortality table, the charge came to ₹1,420. This amount was deducted monthly from the investment units. As he grew older, the mortality charge gradually increased because the risk of death rises with age. By the time he reached 45, the annual mortality charge had increased to ₹2,310. Even though the charges rose over time, the remaining premium continued to get invested in the ULIP funds, allowing his investment to grow while still maintaining life protection.
Historical Reference
- 17th–18th Century – Mortality Tables Introduced
Edmond Halley’s 1693 life table marked the beginning of scientific mortality pricing. - 19th Century – Actuarial Science Expansion
Life insurers globally adopted mortality-based premium structuring to balance claims risk and solvency. - 2000s – ULIPs in India
With IRDAI’s approval of ULIPs, mortality charges became a visible cost component for policyholders, deducted monthly from fund values. - 2013 – IRDAI Mortality Charge Transparency Rules
Mandated insurers to clearly disclose mortality charges in benefit illustrations and policy documents.