Mortality Charge is the amount charged every year by the insurer to provide the life cover to the policyholder on the life of the Life Insured. It can otherwise be called the Cost of Insurance.
Let us take an example. Ravi Agarwal pays a premium of Rs 10,000 towards his life insurance policy for which he would get a life coverage of Rs 1,00,000. Now a part of the Rs 10,000 premium that he paid is the ‘Cost of Insurance’ or ‘Mortality Charge’. Mortality Charge is usually a very small amount, say Rs 200 p.a. from the Rs 10,000 annual premium that Ravi paid for his insurance. From the remaining amount of Rs 10,000-Rs 200= Rs 9,800 an expense is deducted for office administration, policy maintainance etc. and the rest would go for investment.
Thus, Mortality Charge is an expense which is charged by the insurer to provide the life coverage. It is the amount charged for the guaranteed Sum Assured which is paid on premature death of the policyholder.
Technically, Mortality Rate is a measure of the number of deaths (in general, or due to a specific cause) in some population, scaled to the size of that population, per unit time.
This is the reason why term insurance plans are the cheapest and best form of life insurance. In term insurance plans there is no investment component and hence the only charge that applies is the mortality charge apart from the administrative costs.
Mortality table is a table based on past data on life expectancy of human beings. It is based on the age factor. After evaluating past data, the actuaries of Insurance Companies derive the Mortality table which is used for premium calculation. This table calculates the human life expectancy by taking into account the diseases, medical science improvement, and all the other factors that help to improve the mortality rate of human beings and reduce the cost of insurance for the policyholders.
After deduction of Mortality Charge, the same is kept aside by insurance companies in the “Life Fund”, which is kept to pay out Death Benefit. This Life Fund is not invested anywhere. It is kept very safely so as to pay Sum Assured to the families of the deceased policyholders.
