Premium Allocation Charge

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Definition

Premium Allocation Charges is a percentage of the first year of premium charged by life insurance company before allocating the policy. The charge includes the initial and commission expenses of the intermediary.

Description:

Premium Allocation Charges (PAC) is the percentage deducted from the premium. The amount is deducted even from the additional rider covers. PAC is also charged on the renewal premium however the quantum of deduction reduces every time the policy is renewed. Some insurance companies may charge PAC for the initial years like 5-7 years only.

Premium Allocation Charges vary with single premium plan or regular premium one. It also gets affected by the premium amount, payment mode and the premium frequency (monthly, quarterly, or yearly).

Example:

Let’s say the premium allocation charges are 12% on the premium of Rs.1 lakh under a ULIP. The insurance company will charge Rs.12,000/- and the balance amount of Rs.88,000 will be available for further allocation. A decided part will be consumed to offer the life insurance and the remaining will be invested in the market-linked products to grow the money.

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