Joint life insurance is decided by the partners of the firm on the joint lives of the other partners. The purpose of the joint life policy is to reduce the financial burden on the firm at the time of payment of a large amount to the legal representative of the deceased partner. The insurer receives payment after the death of its insurance partner. There are different methods for accounting treatment of joint life policy.
The firm pays the premium on the Joint Life Policy. The Insurance Company pays the amount of the Joint Life Policy on the maturity of the policy or the death of a partner, whichever is earlier. The surrender value at the time of the death of a partner is distributed among the remaining partners and the legal representative of the deceased partner.
The accounting treatment for Joint Life Policy at the time of the death of a partner is as follows:
- Premium Method-
When the partners decide to treat the premium on Joint Life Policy as an expense and debit the Premium Account to the Profit and Loss Account every year, the Joint Life Policy will not appear in the Balance Sheet. In this situation, the full amount of policy received in the event of the death of a partner from the Insurance Company becomes a gain.
- Surrender Value Method-
The partners may decide to record the Joint Life Policy at the surrender value in the books. In this case, it will appear on the assets side of the Balance Sheet.
- Joint Life Policy Reserve Method-
The partners may maintain the Joint Life Policy Account as well as the Joint Life Policy Reserve Account. Thus, under this method, both Joint Life Policy Account and Joint Life Policy Reserve Account appear at surrender value on the Assets and Liabilities side of the Balance Sheet, respectively. At the time of the death of a partner. Read More…