Mortality and Expense Risk Charges (M&E Charges)

Mortality and Expense Risk Charges (also known as M&E Charges or M&E Fees) are a type of fee charged by an insurance company specifically on variable annuity and other types of annuity contracts. Think of it as the insurance company’s built-in insurance policy—against you. The “mortality” part covers the risk that you'll live longer than the company's projections, forcing them to pay out an income stream for more years than planned. The “expense” part is a catch-all that covers the company's costs for selling and administering the contract, including sales commissions, paperwork, marketing, and, of course, a slice of profit for the insurer. These charges are typically expressed as an annual percentage of your account value, often ranging from 1% to 2% or more. They are deducted directly from your investment assets within the annuity, creating a significant and continuous drag on your returns.

While the name sounds technical, the concept is quite simple once you break it down into its two core components. These charges are the price you pay for the unique promises and structure that an annuity offers.

The mortality risk charge is the premium you pay for the insurer's guarantee. In the context of a lifetime income annuity, the risk to the insurer is that you and other annuitants, as a group, live longer than their actuarial tables predict. If that happens, the company is on the hook to keep sending you checks, potentially for decades longer than they budgeted for. This charge compensates them for taking that “longevity risk” off your hands. It also often covers the cost of a guaranteed death benefit, which ensures that if you die before a certain point, your beneficiaries will receive at least the amount you originally invested.

The expense charge is more straightforward. It’s the cost of doing business. Running a massive insurance company isn’t cheap, and this fee helps cover a wide range of operational costs.

• Commissions: A significant portion often goes to the financial advisor or agent who sold you the annuity.
• Administration: This includes the costs of record-keeping, processing transactions, and sending you statements.
• Marketing: Those television commercials and glossy brochures are paid for by this fee.
• Overhead and Profit: Like any business, the insurance company needs to cover its general costs and generate a profit for its shareholders.

For a value investor, fees are the enemy. They are a guaranteed loss that must be overcome by investment performance just to break even. M&E charges are particularly important to scrutinize because they are high and relentless.

M&E charges are a direct, persistent drag on your investment's performance. An annual charge of 1.25%, for example, means your underlying investments must earn 1.25% before you see a single penny of growth. Over 20 or 30 years, this compounding fee can consume a massive portion of your potential returns. A value investor, who meticulously seeks undervalued assets, should be just as meticulous about avoiding overvalued fee structures. The high cost of many annuities stands in stark contrast to the philosophy of keeping investment costs as low as possible, a principle championed by legendary investors like Warren Buffett and Jack Bogle.

Before committing to an annuity, it's critical to compare its total costs (including M&E charges and any other riders or fees) to other investment options. You can often achieve similar investment exposure with far lower costs using low-cost index funds or ETFs in a standard brokerage or retirement account. While these don't offer the same income guarantees, the cost savings can be so substantial that you may be better off building your own “longevity insurance” through a larger nest egg. The core question a value investor must ask is: Is the guarantee worth the price? You are paying the M&E charge for a specific promise from an insurance company. You must analyze whether the margin of safety this promise provides is worth the high and certain cost that will erode your capital over the long term. In many cases, the price is simply too high.