Variable annuities can look attractive because they combine investment opportunities with insurance features. You can invest in market-based subaccounts while potentially gaining death benefits, lifetime income options, and other contractual protections.
But those insurance features are not free.
One of the most important costs to understand is the mortality and expense risk charge, commonly called the M&E charge. Unlike a one-time transaction fee, this expense is usually calculated as a percentage of account value and can continue year after year.
That makes mortality charges in variable annuity cost analysis especially important for long-term investors. A percentage that looks relatively small on a prospectus can become meaningful after 10, 20, or 30 years of compounding.
The charge itself is not automatically unreasonable. Insurance companies assume genuine risks when they offer contractual guarantees. The key question is whether the protection being provided is valuable enough to justify its ongoing cost.
Understanding what the charge covers is the first step toward answering that question.
What Is a Mortality and Expense Risk Charge?
The mortality and expense risk charge compensates an insurance company for certain risks it assumes when issuing a variable annuity.
Investor.gov explains that this base contract fee is often referred to as the mortality and expense, or M&E, risk charge. It is typically assessed as a percentage of account value and is often around 1.25% annually, although actual contracts vary considerably.
The “mortality” part relates partly to actuarial risk.
For example, when an insurer promises lifetime annuity payments, it faces the possibility that annuitants as a group live longer than originally projected. Recent SEC-filed variable annuity documents describe this as a mortality risk assumed by the insurer.
The “expense” component relates to the risk that issuing, administering, and maintaining contracts costs more than the insurer expected.
Together, these risks form part of the economic reason the charge exists.
A Small Percentage Can Become a Large Dollar Amount
Percentage-based charges sometimes look harmless because the number appears small.
Consider a variable annuity with an annual M&E charge of 1.25%. The SEC provides an example where an average account value of $20,000 results in $250 of mortality and expense charges during the year.
Scale that up to a larger retirement portfolio and the dollar amount becomes much more noticeable.
On an average account value of $300,000, a hypothetical 1.25% charge represents $3,750 annually before considering other fees.
And the investor may also face fund expenses, administrative charges, and optional rider costs.
The real concern is not simply the annual expence. It is the investment growth that those deducted dollars can no longer generate in future years.
That opportunity cost becomes more significant as the holding period gets longer.
Mortality Charges Reduce the Return Available for Compounding
Compounding works both ways.
Returns compound positively, but recurring fees continuously reduce the capital available to earn those returns.
Imagine $200,000 invested for 25 years and assume, purely for illustration, that the underlying investments produce an average gross return of 7% annually.
Without considering taxes or other costs, $200,000 compounding at 7% would grow to roughly $1.09 million.
If annual expenses reduced the effective return to 5.75%, the ending value would be roughly $810,000.
The difference is substantial.
Actual variable annuity performance will fluctuate, and an M&E charge may not be the only reason net returns differ. The example simply illustrates how a recurring percentage expense can influence a long-term outcome.
That is why cost analysis should focus on net returns rather than the gross performance of the underlying investment portfolio.
Mortality Charges Are Only One Layer of Variable Annuity Costs
A common mistake is seeing the M&E charge and assuming it represents the total cost of the annuity.
It usually does not.
The SEC identifies several potential expenses in variable annuities, including administrative fees, underlying fund expenses, surrender charges, and additional fees for special benefits such as enhanced death benefits or guaranteed minimum income features.
The NAIC also identifies mortality and expense risk charges as one category of variable annuity costs while separately listing underlying fund charges and transaction-related expenses.
Suppose a hypothetical contract includes:
a 1.10% M&E charge, 0.15% administrative expenses, 0.70% underlying fund costs, and a 1.00% optional income rider.
Total annual costs could approach 2.95%, depending on exactly how each charge is calculated.
That is a very different investment hurdle from looking only at the 1.10% base charge.
Investors should therefore calculate the total expense structure before making any comparision between products.
Not Every Contract Charges the Same Amount
There is no universal mortality charge across variable annuities.
Recent SEC filings demonstrate just how much contract structures can differ.
One 2026 SEC-filed contract disclosed mortality and expense risk charges ranging from 0.60% to 0.85% depending on contract value. Another disclosed a 0.20% charge below a specified account-value threshold and 0% at higher values under the described structure.
Other contracts may charge considerably more.
This variation makes direct comparison important.
An investor should look beyond the product name or insurance company and examine the specific share class, surrender schedule, account value thresholds, death benefits, and optional riders.
Even contracts issued within similar product categories can have very different economics.
A lower M&E charge can improve long-term compounding, but price should still be evaluated together with the insurance benefits the contract provides.
Ask What Insurance Benefit You Are Actually Buying
Mortality charges make more sense when viewed as the price of insurance rather than simply as an investment-management cost.
The insurer is accepting contractual risks.
For example, certain variable annuities offer death benefits that can protect beneficiaries under defined circumstances. Annuitization features can also transfer part of longevity risk from the retiree to the insurer.
That protection may be useful.
Suppose an investor strongly values guaranteed lifetime income because pension benefits and other reliable income sources are limited. Paying additional insurance costs could be reasonable if the annuity meaningfully strengthens the retirement plan.
Another investor may already have a pension, strong Social Security income, substantial liquid assets, and little interest in the contract’s death benefit.
For that person, paying the same mortality charge may deliver far less practical value.
The central question should therefore be: What specific risk is this fee paying the insurer to assume?
If the answer is unclear, the contract deserves closer examination.
Mortality Charges Can Matter More During Long Holding Periods
Variable annuities are generally designed as long-term products, which makes recurring expenses particularly important.
A difference of 0.25% may seem insignificant over a single year. Across several decades, however, even modest cost differences can compound into substantial amounts.
This becomes especially relevant when two contracts offer similar investment choices and comparable guarantees.
Suppose Contract A has an M&E charge of 0.75% while Contract B charges 1.25%. On a $400,000 account, that initial difference equals about $2,000 annually, assuming the percentages apply to the same value in the same way.
As account values change, the dollar charges change as well.
That money either remains invested for the retiree or goes toward contract expenses.
For someone expecting to hold an annuity throughout a long retirment, comparing recurring charges can therefore matter more than small upfront differences.
Lower Mortality Charges Do Not Automatically Mean a Better Contract
Cost matters, but simply choosing the annuity with the lowest M&E fee can also be a mistake.
A cheaper contract may provide fewer guarantees, a weaker death-benefit structure, different investment choices, or less suitable income options.
Conversely, a more expensive product may include valuable insurance protection.
Recent SEC disclosures show that contract structures and mortality charges can vary considerably, reinforcing the need to compare the full package rather than one fee in isolation.
Think of it like insurance generally.
The cheapest policy is not necessarily the best if it does not protect the risk you care about. The most expensive policy is not automatically better either.
What matters is value.
An investor should compare the cost of each guarantee with the likelihood that the feature will actually improve retirement security.
Mortality Charges Should Be Evaluated Alongside Income Riders
Modern variable annuities can become even more complicated when guaranteed lifetime withdrawal benefits or other living-benefit riders are added.
These riders often have fees separate from the base mortality and expense charge.
That means paying the M&E charge does not necessarily mean every lifetime-income guarentee is already included at no extra cost.
Investor.gov notes that special variable annuity features may carry additional fees and should be evaluated independently.
This distinction matters when comparing retirement-income solutions.
An annuity may appear to charge 1.20% at the base contract level, but adding an income rider and accounting for underlying fund expenses could push the total annual cost much higher.
Always calculate the all-in expense before judging whether the guaranteed income feature is attractive.
Mortality and expense risk charges are easy to overlook because they are usually expressed as relatively small annual percentages. Over a long retirement horizon, however, recurring fees can meaningfully reduce the amount of capital available for compounding and future income.
That does not mean M&E charges are automatically wasteful. They compensate insurers for real contractual risks, including mortality and expense obligations, and the associated insurance benefits may be valuable for certain retirees.
The goal is to understand exactly what you are buying.
Before purchasing a variable annuity, compare the M&E charge, administrative expenses, underlying fund costs, rider fees, surrender provisions, and insurance guarantees together.
Calculate the total annual cost and ask whether each benefit solves a real retirement problem. Good cost analysis is ultimately about value, not simply finding the lowest percentage.
