Definition
A mortality and expense charge (M&E) is the bundled annual fee assessed against a variable annuity contract's account value that compensates the carrier for the mortality risk it bears under the contract's death benefit and for the carrier's administrative and operating expenses, typically expressed as a percentage of the account value charged daily and assessed against the contract's subaccounts.
Why it matters
The mortality and expense charge is the principal recurring cost embedded in most variable annuity contracts — the largest single non-rider fee component in typical variable annuity pricing. Naming it explicitly is what makes the contract's overall cost structure inspectable, because the M&E charge bundles two distinct functions (mortality risk compensation and carrier expense compensation) into a single line item that disclosure documents commonly present without further decomposition.
How it works
The mortality and expense charge is assessed daily as a fraction of the contract's account value, accruing to a stated annual rate typically expressed as a percentage. The mortality portion of the charge compensates the carrier for the risk that the carrier will be required to pay the guaranteed minimum death benefit (GMDB) — the difference between the account value and the guaranteed minimum at the contract owner's death — and for the carrier's pricing of the contract's lifetime guarantees more broadly. The expense portion compensates the carrier for administrative, recordkeeping, and operating costs associated with maintaining the contract. The two functions are not separately disclosed within the M&E charge itself; the bundled charge is presented as a single percentage in the contract's fee disclosure. M&E charges vary substantially across variable annuity products — older or more feature-rich contracts often carry higher M&E charges, while newer or simplified products carry lower charges. The charge is in addition to the contract's subaccount expense ratios (which compensate the underlying fund managers) and any separately disclosed rider charges.
In practice
For an individual considering a variable annuity, the M&E charge is the principal recurring cost the contract carries before any separately disclosed rider charges. The operative questions are the level of the M&E charge relative to other available variable annuity contracts, what the mortality portion specifically funds (typically a standard GMDB, with enhanced death benefit features funded through separate rider charges), and how the M&E charge compares to alternative arrangements for achieving similar objectives. A professional should be able to present the contract's total annual cost — M&E charge plus subaccount expenses plus any rider charges — and to compare that total against alternatives. The informal term "M&E fee" or "ME fee" is sometimes used in commercial materials and search queries; the canonical reference is the mortality and expense charge.
Related terms
- Variable annuity
- Guaranteed minimum death benefit (GMDB)
- Subaccount
- Separate account
- Account value
- Enhanced death benefit rider
- Cost structure
- Insurer load