Annuity Mortality & Expense (M&E) Fee: What It Is, What It Costs, and How to Avoid It
If you have been researching annuities, you have probably encountered the term mortality and expense fee — or M&E fee. For many consumers, this is one of the most misunderstood charges in the annuity industry. This guide explains exactly what the M&E fee is, how much it costs in real dollars, which annuity types charge it, and — importantly — how to avoid it entirely.
What Is a Mortality and Expense (M&E) Fee?
The mortality and expense fee is an annual charge built into variable annuity contracts. It compensates the insurance company for two specific guarantees it provides to the contract owner:
- Mortality risk (the “M”): The insurer guarantees a minimum death benefit — typically the original premium or the account’s highest value — even if the market has pushed the contract below that amount when the owner dies. The M&E fee covers the insurer’s cost of bearing that mortality risk.
- Expense risk (the “E”): The insurer guarantees that the contract’s administrative expenses will not increase above the stated amount. If the insurer’s actual administrative costs exceed expectations, the difference comes from company reserves, not from you.
In practice, the M&E fee is charged as a percentage of your account value each year — typically between 0.50% and 1.50%, with 1.25% being the industry average for commission-based variable annuity contracts.
The Real Cost of M&E Fees Over Time
Because the M&E fee is charged as a percentage of your account value — not a flat dollar amount — its actual cost grows as your account grows. Here is what a 1.25% M&E fee costs in real dollars at different account sizes:
| Account Value | Annual M&E Fee (1.25%) | 5-Year Cost | 10-Year Cost |
|---|---|---|---|
| $100,000 | $1,250/yr | ~$6,500 | ~$14,000 |
| $250,000 | $3,125/yr | ~$16,250 | ~$35,000 |
| $500,000 | $6,250/yr | ~$32,500 | ~$70,000 |
| $1,000,000 | $12,500/yr | ~$65,000 | ~$140,000 |
Note: 5- and 10-year estimates assume modest account growth. Actual costs compound as account value increases — meaning the total M&E drag over time is typically higher than the flat-dollar illustration above.
And that is just the M&E fee. Variable annuities also layer on underlying fund expense ratios (typically 0.50%–1.50%), administrative fees, and optional rider charges — pushing total annual costs to 2.00%–4.00%+ in many contracts.
Do Fixed Annuities Have M&E Fees?
No. Fixed annuities — including MYGAs and traditional fixed annuities — do not charge M&E fees.
With a fixed annuity, the insurance company earns its profit on the spread between what it earns investing your premium in its general account (primarily bonds) and the interest rate it credits to your contract. There is no separate fee line item for mortality risk or expense guarantees — those costs are built into the spread, not charged to your account directly.
This structural difference is one of the most important reasons many retirees and fee-conscious investors choose fixed annuities over variable annuities: you know exactly what you will earn, with no annual percentage being siphoned from your account value.
Do Fixed Index Annuities (FIAs) Have M&E Fees?
No. Fixed index annuities do not charge an explicit M&E fee either. Like traditional fixed annuities, FIAs earn their spread through the difference between investment returns and the index credits they pass along to contract holders. However, there are a few cost-related features of FIAs to understand:
- Participation caps and spreads. Rather than charging a fee, FIAs limit your upside through participation rates (e.g., 80% of index gains) or caps (e.g., maximum 10% annual gain). This is the insurer’s mechanism for managing cost — not a line-item fee.
- Optional income rider fees. If you add a guaranteed lifetime income rider to an FIA, most contracts charge an annual rider fee of 0.75%–1.25% of the benefit base. This is optional and specific to the income rider feature — not an M&E fee.
- No underlying fund expenses. Unlike variable annuities, FIAs do not involve sub-accounts invested in mutual funds, so there are no fund expense ratios layered on top.
Variable vs. Fixed Annuity: Fee Comparison
| Fee Type | Variable Annuity | Fixed Annuity (MYGA) | Fixed Index Annuity (FIA) |
|---|---|---|---|
| M&E fee | 0.50%–1.50%/yr | None | None |
| Fund expense ratios | 0.50%–1.50%/yr | None | None |
| Administrative fee | $25–$50/yr or 0.15% | None or small flat fee | None or small flat fee |
| Income rider fee | 0.50%–1.25%/yr (optional) | N/A | 0.75%–1.25%/yr (optional) |
| Total typical cost range | 1.50%–4.00%+/yr | 0% | 0% (without riders) |
| Principal protection | No (subject to market loss) | Yes — full guarantee | Yes — 0% floor |
When Is an M&E Fee Worth Paying?
To be fair: variable annuities are not inherently bad products, and M&E fees are not arbitrary. If you have a large qualified account, want stock market participation inside a tax-deferred wrapper, and specifically value the guaranteed minimum death benefit — there is a legitimate case for accepting the M&E charge. The key question is whether the death benefit guarantee is worth what it costs you in annual fees.
For most retirees focused on guaranteed income, principal protection, or competitive fixed interest rates, the answer is that the M&E fee represents a cost without a proportionate benefit. A fixed annuity delivers principal protection, guaranteed growth, and tax-deferred accumulation — without the annual percentage drag.
How to Evaluate Any Annuity’s True Cost
Before purchasing any annuity, ask the agent for a complete fee disclosure. The total annual cost includes:
- M&E fee (variable annuities only)
- Underlying fund expense ratios (variable annuities only)
- Administrative or contract maintenance fee (most annuity types)
- Optional rider fees (income riders, enhanced death benefit riders, long-term care riders)
- Surrender charges (applies during the surrender period on most annuity types)
For a fixed annuity or MYGA, items 1 and 2 do not apply, and item 3 is typically minimal or zero. Your total annual cost is effectively zero beyond the spread built into the credited rate — and that spread is transparent: the rate you are quoted is the rate you earn.
Frequently Asked Questions About Annuity M&E Fees
What is the average M&E fee for a variable annuity?
The industry average M&E fee for a commission-based variable annuity is approximately 1.25% per year, though rates range from 0.50% to 1.50% depending on the contract and carrier. Fee-based variable annuities (sometimes called I-shares) typically carry lower M&E charges of 0.15%–0.50% but may charge an advisory fee on top.
Can I negotiate or reduce M&E fees?
M&E fees on variable annuities are set by the carrier and are not typically negotiable for individual contracts. Your best option for reducing M&E fees is to compare contracts across carriers — some carriers offer lower-cost variable annuity structures — or to evaluate whether a fixed annuity or FIA better meets your goals without the fee at all.
Are M&E fees tax-deductible?
No. M&E fees charged inside an annuity contract are not separately deductible. They reduce the growth of your account value over time, which effectively reduces your eventual taxable gain — but there is no direct deduction you can claim on your tax return.
Do all annuities have hidden fees?
Not all annuities have hidden fees. Fixed annuities and MYGAs are among the most transparent financial products available — the rate you are quoted is the rate you earn, and there are no annual percentage fees reducing your account value. Variable annuities are more complex, with multiple fee layers that are disclosed in the prospectus but often not clearly explained at the point of sale. Always ask for a complete, itemized fee disclosure before purchasing any annuity.
How do I know if a fixed annuity has any fees?
Most fixed annuities (MYGAs) have no explicit annual fees. Some contracts charge a small flat administrative fee — typically $25–$50 per year — which is disclosed in the contract. Optional riders, such as a guaranteed lifetime income rider on a fixed index annuity, carry their own fee (typically 0.75%–1.25% annually of the benefit base). Ask your agent to confirm the complete fee structure in writing before you sign.
Is a fixed annuity better than a variable annuity for avoiding fees?
For retirees focused on principal protection and guaranteed income, fixed annuities eliminate the M&E fee and fund expense layers entirely — which can represent a significant cost saving over a 5- to 10-year period. The trade-off is that fixed annuities do not participate in market upside. Fixed index annuities offer a middle ground: no M&E fee, no market loss, and some upside participation through index-linked crediting. The best choice depends on your income goals, timeline, and risk tolerance.
Get a No-Fee Fixed Annuity Comparison
Kevin Edwards at Integrity Now Insurance Brokers (CA License #0D42517) specializes exclusively in fixed annuities, FIAs, and MYGAs — none of which carry M&E fees. As an independent agent, he compares rates from 20+ top-rated carriers to find you the highest guaranteed return with complete principal protection and zero annual fee drag. Call (877) 854-7396 or complete the free annuity quote request — there is no obligation and no cost.