Accounting Treatment for Life Insurance Policies

In this article we will discuss about the accounting treatment for life insurance policies.

Sometimes a Life Insurance Policy is taken in discharge of a debt from a debtor.

Accounting Treatment:

In the books of the Creditors:

Accounting treatment in the books of creditor depends on the following two conditions:

(a) Whether said policy is surrendered to the Insurance Company: or,

(b) Whether the said policy is kept alive, i.e., Continuing.

(a) If the policies surrendered to the Insurance Company:

N. B. If any debt is left, i.e. the unsatisfied balance will be transferred to Bad Debts Account.

(b) If the policy is kept alive, i.e., Continued:

In this case, the annual premium is to be paid as and when it becomes due. For this purpose, it is better to provide an amount equal to the difference between the surrender value of the policy and the amount of debt so due out of profits and transfer the debtors’ balance to a policy account. The policy account will be debited by the amount of premium since the premium is paid every year.

In addition, an adjusting entry is necessary in order to leave to the debit of the policy amount (with the actual surrender value of the policy). But when the policy becomes mature for payment, naturally, the amount so received will be higher than the policy amount, the surplus/profit will be credited to Profit and Loss Account.

Note: It is to be remembered that the value of a life insurance policy will always be at its surrender value and not its face value. As a result, if a policy is taken from a customer in satisfaction of his debt, the same should be credited at its surrender value.

Under the circumstances, we may prepare the account in two methods:

Method I:

Entries under this method:

Method II:

Entries under this method:

In the books of the debtors:

Entries: