SIE practice questionhardVariable Annuities — M&E Charges
Mortality and expense (M&E) risk charges in a variable annuity compensate the insurance company for:
- AManaging the investment subaccounts
- BTaxes owed by the annuity owner
- CFDIC insurance on the separate account
- DThe risk that annuitants will live longer than expected (mortality risk) and the guarantee that expenses will not exceed a stated maximum✓ Correct answer
Explanation
Why D — The risk that annuitants will live longer than expected (mortality risk) and the guarantee that expenses will not exceed a stated maximum
M&E charges compensate the insurer for two guarantees: (1) mortality risk — the risk annuitants live longer than actuarial estimates, requiring payments beyond what reserves would cover, and (2) expense risk — the guarantee that administrative charges won't exceed a specified level. M&E charges typically range from 1.00% to 1.50% annually and are separate from investment management fees.
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