Mortality and Expense (M&E) Risk Charge

The Mortality and Expense (M&E) Risk Charge is a fee insurance companies bake into certain products, most famously variable annuities. Think of it as the insurance company’s own insurance policy, and you’re the one paying the premium. This charge compensates the company for two key risks it takes on when it sells you an annuity. The 'Mortality' part covers the risk that you might live longer than their statisticians (called actuaries) predicted, forcing them to pay you for more years than planned—a risk also known as longevity risk. The 'Expense' part is simpler: it covers the company’s administrative and distribution costs, like sales commissions, marketing, and paperwork. This fee is typically expressed as an annual percentage of your account value, often around 1.25%, but it can vary. It's a crucial number to watch because it directly eats into your investment returns over the long haul, separate from the fees of the underlying investments within the annuity.

When an insurance company sells you an annuity, it's making a bet on your lifespan. The 'Mortality' portion of the M&E charge is the company’s way of hedging that bet. This fee pool is used to fund the various insurance guarantees that make annuities unique. These can include:

• A death benefit, which guarantees that if you pass away before the annuity starts paying out, your beneficiaries will receive at least a certain amount, often the total you contributed.
• A guaranteed minimum income benefit (GMIB), which promises a minimum level of lifetime income, regardless of how your underlying investments perform.

Essentially, you are paying the company to take on the risk that you’ll outlive your money or that your investments will crater just before you retire.

This part of the charge is much more straightforward. It’s the cost of doing business. It pays for everything from the salesperson’s commission and the glossy brochures to the salaries of the administrative staff who manage your contract and the overhead for the company's offices. While every investment product has costs, the layered and often opaque nature of annuity expenses means this component can be quite hefty compared to more direct investment vehicles.

As an investor, you love the magic of compounding. Unfortunately, fees compound too, but against you. The M&E charge is a direct, persistent drag on your portfolio's performance. A 1.25% M&E charge, when added to the management fees of the annuity’s sub-accounts and other administrative charges, can easily push the total annual expense ratio above 2% or even 3%. This can cripple your long-term returns. A value investor’s primary goal is to maximize long-term returns by minimizing frictional costs. The M&E charge is a massive frictional cost.

This is the central question every investor must ask. You are paying a high, certain cost (the M&E charge) in exchange for an uncertain future benefit (the guarantee, which you may never even need). A disciplined value investor understands that managing risk is crucial, but questions whether outsourcing that risk to a high-cost third party is the best approach. Before buying the “peace of mind” an annuity promises, ask yourself:

• Could I achieve a similar level of safety more cheaply myself with a diversified portfolio of low-cost stocks and bonds?
• Is the worst-case scenario the guarantee protects against likely enough to justify giving up 1-2% of my returns every single year?

Often, the high price of the guarantee destroys more wealth than it could ever protect.

Insurance companies are not famous for their transparency. You won't find the M&E charge advertised on the front page. To find it, you must become a financial detective and dig into the annuity’s prospectus. Buried within this lengthy legal document, you will find a fee table. The M&E charge will be listed there as a percentage. Remember to add this to all the other fees to calculate your true “all-in” cost.

From a value investing perspective, products built around a hefty Mortality and Expense charge should be viewed with extreme skepticism. The philosophy of legendary investors like Benjamin Graham and Warren Buffett is rooted in an obsessive focus on minimizing costs and maximizing the intrinsic value of your holdings. The M&E charge does the opposite: it guarantees a significant transfer of wealth from your pocket to the insurance company's, year after year, regardless of performance. While the security of a guarantee is emotionally appealing, the price is often far too high. Before locking your capital into a complex, high-fee annuity, first consider if your retirement goals could be met more efficiently through a simple, low-cost portfolio of index funds or ETFs. With these instruments, your costs are minimal and transparent, allowing your capital to compound for your benefit—not for the benefit of a sales agent.