Role of mortality charge in relation to Insurance as investment

Published: Saturday, February 8, 2014, 9:38 [IST]

People who consider a life insurance policy to be a pure investment tool often forget about the mortality charges associated with such a policy. The mortality charge is the amount that the insurance company levies from the policyholder for undertaking the risk of covering his/her life. The mortality charge is deducted from the premium before the money is set aside for the investment fund. As a result, if you are looking to buy an insurance policy to invest your money, remember that a part of it is being deducted and only the remaining portion is being invested. If you are investing in a fixed deposit or a savings account, such a thing won't take place.

What exactly is the mortality charge and how is it calculated?

As mentioned above, mortality charge is the charge deducted from your premium amount in return for the life protection provided to you. The mortality charge depends on a number of factors such as age of the policyholder, occupation of the policyholder, gender of the policyholder and so on. Basically, the risk associated with the life of the person is evaluated. If the person has a higher risk of dying he is charged a higher mortality charge. For example, a 50 year old man is more likely to get ill and die than a 20 year old. Also, a firefighter is more at risk than a banker.

IRDA's Indian Assured Life Mortality Table is the table used by all insurance companies in India to calculate the mortality charges. The mortality charges differ from company to company, but cannot exceed the highest limit set by the IRDA.

If you purchase the insurance policy directly from the company, preferably from the website, the charges are reduced because the insurer saves on commission. Then, one insurance company's average claim ratio will definitely differ from the others. These factors also play a role in determining the mortality charge the policyholder has to pay.

Insurance as an investment tool

Mortality charges are associated with all life insurance products. However, the charges are higher in plans that have a return of premium component. Therefore, endowment plans, child plans, retirement plans and money back plans cost you more than a term life insurance plan. Keep this in mind when you buy an insurance policy.

Conclusion

Insurance should never be viewed as a pure investment tool. The main purpose of an insurance policy is to cover your life and benefit your nominees if you were to die suddenly. View life insurance in that light and you will be able to make a smart investment. Many people make the mistake of buying insurance policies for reasons such as saving tax and investing money. In such cases, the policy will be of very little use and in the end you will end up losing more money than saving. So understand the concept of mortality charge very clearly before you buy a life insurance policy. Speak to your agent or speak to the insurance company directly and have all your doubts cleared.

Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may contact him directly on Twitter: @dyohannan

Story first published: Saturday, February 8, 2014, 9:38 [IST]