What it means
Variable annuities wrap investments in insurance promises, and the promises are not free. The mortality and expense risk charge, the M&E, is the fee that pays for them, deducted from the account value every year.
The name unpacks into two guarantees. Mortality covers the promise to pay a death benefit, often the greater of the account value or the premiums paid, and expense covers the insurer's risk that its own costs exceed what it charges.
The fee bites quietly. At one and a quarter percent of account value annually, deducted invisibly from the balance, the M&E compounds against the investor for decades, which is why the Securities and Exchange Commission's investor bulletin on variable annuities tells buyers to total every layer of fees before signing.
The M&E is only one layer. Underlying fund fees, rider charges and surrender penalties stack on top, and the all-in cost of a variable annuity can approach three percent a year, a hurdle the investments must clear before the owner gains anything.
Defenders argue the guarantees earn their price. A death benefit floor and lifetime income options transfer real risks to the insurer, and in panicked markets the floor has real value to the person holding it.
For a business owner, the M&E is a case study in layered pricing. Whenever a product bundles service and insurance, demand the fee schedule layer by layer, because the marketing number is never the whole number, and the compounding of small annual percentages is where long-term wealth quietly leaks.
Shopping by M&E alone still misleads. A contract with a low M&E but expensive riders can cost more overall than a high-M&E plain contract, which is why only the total fee stack decides.
In practice
Real-world examples.
Example
An investor compares two variable annuities. One charges 0.95 percent M&E, the other 1.45 percent; over twenty years on a growing 200,000 account, the difference compounds to tens of thousands of dollars.
Example
A widow receives her late husband's annuity death benefit: the full premiums paid, though the account value had fallen 20 percent. The M&E fee, resented for years, had bought exactly that floor.
Example
A financial adviser totals a proposed annuity's costs: 1.25 percent M&E, 1.1 percent fund fees, 0.9 percent rider. The client, shown the 3.25 percent all-in figure, chooses a simpler investment instead.
Formula
Calculation
Annual M&E cost = account value x M&E rate. The share of return consumed = M&E rate / gross annual return.
Worked example. At 1.25% on a $250,000 account, the charge is 0.0125 x $250,000 = $3,125 that year. If the account grows at 6% gross, the fee takes 1.25 / 6 = 20.8% of the gross return, and the drag compounds for the life of the contract.
Now compare two contracts on a $200,000 account with a 6% gross return and no other fees, over 20 years. At a 0.95% M&E the net return is 5.05% and the account grows to about $535,700. At a 1.45% M&E the net return is 4.55% and it grows to about $487,000. A half-point difference in the annual charge costs roughly $48,800 over the period.Case study
Seen in the real world.
In this illustrative fictional case, Ingrid, a dentist approaching retirement, is pitched a variable annuity with comforting guarantees. Her accountant builds a simple model: the M&E, fund and rider fees total 3.1 percent annually, meaning markets must earn that before Ingrid sees a cent, and the death benefit duplicates the life cover she already owns. She declines the annuity, splits the money between a low-cost portfolio and a smaller guaranteed-income product with transparent pricing, and keeps the fee analysis as a template. Her question for every future pitch becomes reflex: show me every layer, what each buys, and what they total in year twenty.
Watch out
Common mistakes.
- Judging an annuity by its headline return, when the M&E and stacked fees quietly consume one to three percent of the account every year, whatever the markets do.
- Paying for guarantees already owned, when existing life insurance may duplicate the death benefit the M&E buys, making the fee pure waste.
- Ignoring surrender schedules alongside the M&E, when exiting early triggers penalties that lock the fee layers in place for years.
Questions
People also ask.
What does the mortality and expense risk charge pay for?
The insurer's guarantees in a variable annuity: the death benefit promise and the insurer's risk that its costs exceed its charges. It is deducted annually from the account value, typically around one to one and a half percent.
Is the M&E the only annuity fee?
No. Underlying fund fees, optional rider charges and surrender penalties stack on top. The SEC's investor bulletin advises totalling every layer, since all-in costs can approach three percent a year.
Can the M&E ever be worth paying?
When the guarantees match a real need: a death benefit floor or lifetime income for someone without other cover. The test is whether the specific promise is worth its compounding annual cost to you.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%