NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesHard
A client is considering purchasing a variable annuity. They are concerned about the fees associated with the product, particularly those that cover the costs of mortality and expense risk. Which of the following fees specifically covers these risks?
- AUnderlying fund expense ratio
- BSurrender charge
- CAdministrative fee
- DMortality and Expense (M&E) risk charge
Show answer & explanationAnswer & explanation
Correct answer: D. Mortality and Expense (M&E) risk charge
The Mortality and Expense (M&E) risk charge is a specific fee within a variable annuity that compensates the insurance company for the risks it assumes, such as the risk that annuitants live longer than expected (mortality risk) or that administrative expenses are higher than projected (expense risk).
Why the other options are wrong
- A. The underlying fund expense ratio covers the management and operational costs of the subaccounts (mutual funds) within the variable annuity, not the insurance company's mortality and expense risks.
- B. A surrender charge is a penalty for withdrawing funds early from an annuity, not a fee to cover mortality and expense risks.
- C. Administrative fees cover record-keeping and other operational costs, not specifically mortality and expense risks.
Variable Annuity M&E Charge
A fee charged by the insurance company in a variable annuity contract to cover the costs of mortality risk (annuitants living longer than expected) and expense risk (actual expenses exceeding projections).
- Compensates the insurer for guaranteed payouts and administrative costs.
- Typically expressed as a percentage of the contract's net asset value.
- One of several fees associated with variable annuities.
Memory trick: M&E is the Money for Mortality and Expenses.