Mortality and Expense Fee

The mortality and expense risk fee, usually shortened to the M&E fee or M&E charge, is an annual charge on a variable annuity contract, calculated as a percentage of the account's value, that compensates the issuing insurance company for the mortality-related guarantees built into the contract and for the risk that the insurer's own expenses in administering it turn out higher than assumed.

A variable annuity's total annual cost is layered, and the M&E fee is only one layer. Money invested in the contract's subaccounts, functionally similar to mutual funds holding stocks, bonds, or other securities, is charged the subaccount's own expense ratio first, exactly as a mutual fund would charge one. On top of that, the insurer deducts the M&E fee from the account value, again as an annual percentage.

The SEC's investor-education materials describe the two risks the fee is named for in plain terms: the mortality risk is the risk that annuitants, as a group, will live longer than the insurer's actuarial tables predict, which matters most once payments become life-contingent through annuitization, and, before that point, the risk that a contract's death benefit will have to pay out more than the account is worth; the expense risk is the risk that the insurer's actual costs of administering the contracts turn out higher than what it priced into the charge.

Any annuity rider purchased beyond the base contract, such as a guaranteed lifetime withdrawal benefit or an enhanced death benefit, adds its own separate charge on top of the M&E fee. Riders are priced and disclosed independently, and their cost doesn't replace or reduce the base M&E charge.

The combined effect of subaccount expenses, the M&E fee, and any rider charges is why total annual costs on a variable annuity commonly run well above what a comparable mutual fund or ETF portfolio would cost outside an annuity wrapper, and it is the central, recurring critique of the product category: the tax deferral and guarantees a variable annuity offers have to earn back a meaningfully higher annual drag before the contract outperforms simply investing the same money directly. A surrender charge is a separate cost entirely, assessed only if money is withdrawn early, rather than an ongoing annual fee.

A hypothetical example: a $250,000 variable annuity carries a 1.30% M&E fee and average subaccount fund expenses of 0.85%, for a combined annual cost of 2.15% (1.30% + 0.85%) with no rider added. That works out to $5,375 a year in fees (2.15% × $250,000), deducted regardless of whether the underlying investments gained or lost money that year.

Pros

• Funds the guarantee behind the contract's base death benefit, which can matter to a buyer who wants investment growth with some downside protection for a beneficiary.
• Disclosed as a specific line-item percentage in the contract's prospectus, so it can be compared across products.

Cons

• Charged every year regardless of investment performance, including in years the subaccounts lose money.
• Stacks with subaccount fund expenses and any rider charges, and the combined total is rarely presented to a buyer as one number up front.
• A buyer who never uses the death benefit guarantee it funds has still paid for it every year the contract was held.