There are essentially three components to the accounting treatment during the insured’s lifetime:
1. The cash surrender value of the life insurance policy is an asset that is recorded on the balance sheet of the company. The amount recorded varies from year to year as the cash surrender value of the policy increases or decreases
2.The payment of the policy premium will be reflected on the balance sheet of the company as a reduction in cash.
3.The increase in the cash surrender value and the payment of the policy premium are reflected in the company’s income statement on a net basis. If the premium paid is greater than the increase in cash surrender value for the year, the difference between the two is recorded as an insurance expense on the income statement. If the premium paid is less than the increase in the cash surrender value, the difference is recorded as an insurance gain.
It is important to note that the insurance expense does not generally qualify as a deduction in the calculation of the company’s taxable income. Conversely, the amount recorded as an insurance gain on the income statement is not included in the company’s income for tax purposes. Any amount of the company’s financial statements that are not taxable or tax-deductible will be adjusted for tax purposes when the corporate income tax return is prepared.
The general accounting entries for life insurance will be;
Suppose, the company pays $ 3,000 as a premium for $ 10,000 life insurance. The cash surrender value increased from $21,900 to $22,700 this year. The entry will be;
Insurance Expense 2,200 (Dr)
Insurance Cash Surrender Value 800 (Dr)
Cash 3,000 (Cr)
Assume, the insured person dies so entry will act like this,
Cash $ 10,000 (Dr)
Insurance Cash Surrendor Value 22,700 (Cr)
Gain on Life Insurance 9,977,300 (Cr)
For your information, Cash Surrender Value (CSV) is the amount which you are supposed to receive after completion of insurance time and premium