Mortality and Expense Risk Charge (M&E Charge)

Mortality and Expense Risk Charge (also known as the 'M&E Charge' or 'M&E Fee') is a specific fee charged by an insurance company on variable annuity and some other types of annuity contracts. Think of it as the price you pay for the insurance wrapper around your investment. This charge compensates the insurer for taking on two key risks. The first is mortality risk: the chance that you, the annuitant, will live longer than their actuarial tables predict, forcing them to make guaranteed payments for an extended period. The second is expense risk: the possibility that the actual costs of administering your policy—things like paperwork, marketing, and paying sales commissions—will be higher than they initially projected. Typically expressed as an annual percentage of your account's value (often around 1.25%), the M&E charge is deducted directly from your investment, regardless of its performance. It’s a core component that funds the annuity’s insurance guarantees, like a death benefit or lifetime income, but it's also a significant source of profit for the insurer.

The name sounds complex, but it’s just two ideas mashed together. Let's pull them apart.

This is the classic insurance part of the deal. The insurer is essentially placing a bet on your lifespan. If you live a very long life, the company might have to pay out a guaranteed minimum income benefit (GMIB) for much longer than they budgeted for. The mortality charge is their compensation for taking that risk. It’s the pool of money used to fund the promises that make annuities different from a standard brokerage account, such as:

• The Death Benefit: A guarantee that if you pass away before annuitizing the contract, your beneficiaries will receive at least a certain amount (often the total of your contributions).
• Lifetime Income Options: The promise to pay you a steady stream of income for the rest of your life, no matter how long that may be.

This is the “peace of mind” feature that salespeople often highlight. The mortality charge is what you pay for it.

This part of the charge covers the insurer's business operating costs and, crucially, their profit. It's a catch-all fee that ensures the company doesn't lose money on the administrative side of your contract. These expenses include:

• Administrative Costs: Record keeping, sending statements, and customer service.
• Distribution Costs: This is a big one. It includes marketing expenses and the sales commissions paid to the agent or advisor who sold you the annuity.
• Contingency Fund: A buffer for unexpected corporate expenses.
• Profit: Let’s be clear—a healthy slice of this fee goes directly to the insurance company's bottom line.

For a value investor, understanding the impact of fees is paramount. The M&E charge is no exception; in fact, it’s one of the most important fees to scrutinize.

Compounding is the magic that grows wealth over time. A high, recurring fee like the M&E charge is the opposite—it's a relentless drag on your returns. Because it's charged as a percentage of your assets, it gets larger as your account grows, creating a significant headwind. For example: Imagine you have $200,000 in a variable annuity with a 1.25% M&E charge. That’s a $2,500 fee every single year, taken right out of your investment account. This happens whether your underlying investments made 15% or lost 15%. Over 20 years, that fee alone—ignoring all other annuity fees and without any investment growth—would cost you $50,000. When you factor in the lost growth on that fee money, the real cost is far higher.

A core tenet of value investing is to never overpay for an asset—or a promise. The M&E charge forces you to ask a tough question: Are the insurance guarantees I'm receiving worth the high, certain, and ongoing cost? In many cases, the answer is no. A disciplined investor can often achieve better long-term results by forgoing the expensive guarantees and investing directly in a low-cost, diversified portfolio of stocks, index funds, or ETFs. The money saved on M&E charges and other annuity fees can be reinvested, allowing the magic of compounding to work for you, not for the insurance company. Before buying any product with an M&E charge, always compare its total, all-in cost against a simple, low-fee alternative. The difference will often be eye-opening.