What is the mortality and expense risk charge in variable annuities?

The mortality and expense risk charge in variable annuities is primarily designed to cover the insurance company's risks associated with providing certain guarantees, such as lifetime income payouts or death benefits. This charge helps protect the insurer from the potential high cost of having to make guaranteed payouts to investors who may outlive their life expectancies or incur other risks.

In this context, the mortality risk aspect of the charge addresses the likelihood that the insurer will need to pay out benefits due to the death of the annuity holder before the company has recouped sufficient reserve from the premiums. The expense risk component covers administrative costs and other expenses associated with managing the annuity contract, ensuring that the insurer can meet its obligations to policyholders.

The other options do not accurately describe this charge. Administrative costs are typically covered by a different type of fee, early withdrawal penalties are aimed at discouraging early access to funds, and taxes pertain to the taxation of investment gains rather than charges levied by the insurer for risk coverage. Thus, the chosen answer reflects the nature of this specific charge within the structure of a variable annuity.