My friend almost had an argument with her Life Insurance agent the other day when he told her that the entire amount she pays as premium would not be invested in her policy. Little did she know that the agent wasn't really bluffing her - there indeed are charges that are deducted from the premium paid towards a Life Insurance Policy and among the most important of these is the Mortality Charge.
Cost of the insurance:
Mortality charge is the amount that is levied by insurance companies to cover death of a policy holder. While the bulk of the premium you pay is put away in a savings fund, the mortality charge is deducted and put in a separate fund. This fund is kept aside and only paid to the nominee of the policy holder in the case of his or her death within the policy tenure. In other words, the mortality charge is the actual price of the insurance policy. The premium amount depends on a number of factors such as age of the person, insurance amount, etc. It is then from this premium that the mortality charge is deducted and the rest of the amount is invested in a savings fund.
Factors that affect the charge:
The mortality charge is levied along with some other charges. So when you pay the premium, the entire amount is not invested. Apart from the agent's commission, administrative charges, etc. the mortality charge is also deducted. The amount taken as mortality charge usually varies from person to person. While a younger person has to pay a lesser amount, an older person is charged more. This is based on the simple logic that the younger person is expected to live longer than his older counterpart. Also, factors such a gender and occupation are considered. Since women are charged a lower premium, the mortality charge is also lesser. What work you do can also impact the charge. If you are an air stuntman, chances are you will end up paying a higher mortality charge than your banker friend!
How it is calculated:
Life Insurance Corporation of India (LIC), the oldest insurance company in the country, has formulated a table and the mortality charge is based on that. Since LIC has been in this business for many decades, they have been able to calculate the mortality charges based on life expectancy data collected over the years. Almost all insurance companies follow this table and levy the mortality charges accordingly. Some private insurers, however, have their own rates. So you must be aware of the general rates before you pay up. Very soon though there will be a new table as LIC, with inputs from all the other insurance companies, is drawing up a new table.
A life insurance policy protects you and your family from catastrophic events like death and monetary losses resulting from it. Fortunately most people do not have to see the mortality charge summed up and returned as 86% of the claims paid in this industry are Maturity Claims and not Death Claims. But Mortality Charge is charged from the policyholder to be able to pay the Death Benefit to his nominee if something unfortunate were to happen to him. Thus Mortality Charge is known as the real "cost" of insurance and protection.
Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
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