Mortality and Expense (M&E) Charges are a specific type of fee that insurance companies levy on owners of variable annuity and variable universal life insurance policies. Think of it as the insurance company's built-in profit and safety net, rolled into one fee. This charge compensates the insurer for two key risks it takes on. The 'mortality' part covers the risk that you, the annuitant, will live longer than their actuarial tables predict, forcing them to make payments for a longer period. The 'expense' part covers the risk that their administrative, marketing, and sales costs will be higher than they initially estimated. M&E charges are typically expressed as an annual percentage of your policy's account value and are a significant, ongoing drag on your investment returns. Understanding this fee is crucial because, for many investors, its high cost often outweighs the benefits of the insurance product it's attached to.
The name sounds complex, but it boils down to the insurance company covering its two biggest worries. By charging you this fee, they pass these risks on to you.
Imagine you make a bet with an insurance company. They bet you won't live to be 110, and you bet you will. In an annuity, the M&E charge is the price you pay the insurer to take their side of that bet. If you live an exceptionally long life, the company is on the hook to keep sending you checks, potentially losing money on your policy. The mortality charge is their way of pooling risk and ensuring they have the funds to pay the super-agers without going bankrupt. It’s the cost of the 'guaranteed income for life' feature.
The expense part is more straightforward. It's the insurer’s protection against rising business costs. This covers everything from sales commissions and marketing campaigns to the electricity bill at their headquarters and the cost of mailing you statements. By locking in this fee, the insurer shifts the risk of inflation and unexpected operational costs from their shoulders to yours. It’s a guaranteed revenue stream for them, regardless of how well your underlying investments perform.
A core tenet of value investing is to never overpay. M&E charges often force investors to do just that, making them a major red flag.
For a value investor, costs are paramount. Every dollar paid in fees is a dollar that isn't compounding for your future. M&E charges, which often hover around 1.0% to 1.5% per year, act as a heavy, unseen anchor on your portfolio. This is in addition to the fees of the underlying investment options (called 'sub-accounts') within the annuity, which are essentially mutual funds with their own expense ratio. When you add it all up, the total annual fees for a variable annuity can easily exceed 2% or 3%. Let's put that in perspective. If your investments gain 7% in a year, a 2.5% total fee reduces your actual return to just 4.5%. This 'fee drag' makes it substantially harder to achieve meaningful growth over the long term. Warren Buffett has long championed low-cost index funds for a reason: minimizing costs is one of the most reliable ways to maximize returns.
M&E charges pay for guarantees, such as a minimum death benefit or a lifetime income stream. The key question a value investor must ask is: Is the price of this guarantee a good value? In many cases, the answer is a resounding no. The 'peace of mind' these features offer comes at an exorbitant, compounding cost. You can often achieve a similar or better outcome more cheaply through other means. For example:
When you encounter a financial product with M&E charges, your alarm bells should ring. Scrutinize the prospectus to understand the all-in cost. Sum up the M&E charge, administrative fees, and the expense ratios of the underlying sub-accounts you plan to use. Compare this total cost to what you would pay by investing through a low-cost brokerage account. More often than not, the simplicity and low-cost structure of direct investing will provide far better value over your lifetime than the expensive 'guarantees' funded by M&E charges.