Definition of Allocation
Allocation in life insurance refers to the method by which premiums, cash value, and investment returns are assigned to the various components or sub‑accounts of a policy. It determines how much of each payment goes toward the death benefit, the cash‑value accumulation, and any optional riders.
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Why Allocation Matters
Because allocation dictates the growth rate of the policy's cash value, it directly influences the policy's overall performance and the flexibility available to the owner for loans or withdrawals.
Types of Allocation Methods
Most policies use one of two approaches:
- Fixed allocation – a set percentage of each premium is assigned to the cash‑value account and the death‑benefit reserve.
- Flexible allocation – the policyholder can choose how to distribute premiums among a range of investment options, similar to a variable universal life policy.
Impact on Policy Features
Allocation affects:
- Cash‑value growth speed
- Cost of insurance charges
- Ability to adjust coverage or add riders
Typical Allocation Table
| Allocation Type | Premium Distribution | Policy Flexibility |
|---|---|---|
| Fixed | Predetermined split (e.g., 70% cash value, 30% death benefit) | Low – changes require policy amendment |
| Flexible | Owner‑selected split among investment sub‑accounts | High – can be rebalanced regularly |