Allocated Loss Adjustment Expenses

ByNathan Paulus
Edited byRae Osborn

Updated: December 14, 2023

ByNathan Paulus
Edited byRae Osborn

Updated: December 14, 2023

Advertising & Editorial Disclosure

Allocated loss adjustment expenses (ALAE) refer to insurance companies' costs when investigating, processing and settling a life insurance claim. ALAE are a key component of insurance administration in establishing claim legitimacy and determining appropriate payouts. ALAE refers to costs incurred for a specific claim and are separate from unallocated loss adjustment expenses, which refer to general claims management costs such as personnel salaries.

These costs are part of an insurer's loss reserves, specifically designed to cover claim settlement payouts. As such, ALAE are not shouldered directly by the policyholder when they make a claim. ALAE applies to all types of insurance companies, but this article will focus on how they work for life insurers.

  • Allocated loss adjustment expenses (ALAE) refer to costs incurred by insurers during insurance claims investigations and settlements that are tied to specific claims.
  • ALAE includes fees charged by investigators, lawyers and arbitrators.
  • ALAE amounts vary by case, determined by the complexity and nature of the claim.
  • Proper handling of ALAE allows for efficient claim settlement and accurate financial planning for the insurer.
  • Policyholders are not directly responsible for ALAEs. However, elevated ALAE could drive up overall insurance premiums over time.

How Allocated Loss Adjustment Expenses Work

Allocated loss adjustment expenses are costs insurance companies incur whenever a claim is filed. ALAE are specifically allocated to individual claims. They commonly encompass fees paid to adjusters, attorneys and experts, court costs and other necessary expenses to establish the claim's legitimacy and determine the payout, which is the death benefit in the case of life insurance claims. ALAE allows insurers to account for these fees and protect their bottom line.

What ALAEs Cover

Allocated loss adjustment expenses cover investigation costs, legal fees and more, which allow for the thorough processing and settlement of insurance claims.

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    Investigation Costs

    These are costs related to investigating the specifics of a claim. This category covers expenses related to gathering evidence, examining documents and validating details.

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    Legal Fees

    Any legal expenses arising during the claim adjustment process are included in ALAE. These might constitute attorney fees, court filings and legal consultations.

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    Expert Consultations

    It may occasionally be necessary to consult an expert during an insurance settlement. For example, home and auto insurance claims may require an expert to estimate repair costs. The cost of hiring an expert for a specific claim would fall under allocated loss adjustment expenses.

ALAE vs. Unallocated Loss Adjustment Expenses (ULAE)

Allocated loss adjustment expenses are costs incurred for a specific insurance claim. On the other hand, unallocated loss adjustment expenses are costs related to general life insurance processing that are not linked to a particular claim. Critical differences between ALAE and ULAE include:

Allocated Loss Adjustment Expense
Unallocated Loss Adjustment Expense

Type of Costs

Costs directly related to a particular claim, such as legal fees, expert testimonies or investigation costs.

Comprise overhead expenses, like staff salaries, training and office equipment, which cannot be attributed to a specific claim.

Expense Calculation

Calculated on a per-claim basis.

Computed as part of the insurer's annual overhead expense.

Claim Specificity

Specific to a claim and varies based on the complexity of the claim.

Consistent across all claims and distributed evenly.

Does ALAE Affect Policyholders?

Policyholders are not directly responsible for ALAE and will not notice these expenses factored into their claim payout or premiums. However, ALAE can indirectly influence insurance premiums.

Since ALAE factor into insurers' operating costs and insurers are in business to make a profit, if these expenses rise, the insurer may need to increase premiums across the board to make up for it. This is similar to how any other business might raise its prices if its cost of goods sold increases — policyholders will not notice the specific effect of ALAE but may nevertheless end up facing higher insurance rates due to an insurer incurring high ALAE.

FAQ About Allocated Loss Adjustment Expenses

These answers to commonly asked questions will help you explore the significance of allocated loss adjustment expenses for policyholders, their role in the claims process and their impact on insurance premiums.

What do allocated loss adjustment expenses mean for policyholders?
What role do allocated loss adjustment expenses play in the claims process?
How do allocated loss adjustment expenses affect insurance premium rates?

Related Content

Although allocated loss adjustment expenses (ALAE) apply to various types of insurance companies, the following articles provide a broader understanding of life insurance, specifically, as well as the claims process:

  • Types of Life Insurance — This is an overview of different life insurance types, each potentially involving varying ALAE due to their unique claim processing and risk assessment requirements.

  • What Is Covered by a Life Insurance Policy — Details the typical coverage of life insurance policies, providing vital information for policyholders about what to expect from their policies.

  • What Types of Death Are Not Covered — Explains the exclusions in life insurance policies, including specific types of deaths that are not covered, a key aspect for policyholders to understand.

About Nathan Paulus

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Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.