A—Book Accounting for Business Life Insurance
Premium Payments. With cash value insurance the excess of net premiums paid (i.e., the premiums paid less dividends declared, if any) over the increase in cash surrender values is considered an insurance expense. Because premium payments are generally not deductible as a business expense, they are usually considered an “Extraordinary Item” and placed on the profit and loss statement before “Net Income Before Taxes.” Alternatively, the insurance expense could be shown on the balance sheet as a direct charge to capital, with no entry being made on the profit and loss statement (note that this method highlights the non-tax-deductible nature of the expense).
Businesses often purchase commercially designed and priced COLI policies (rather than traditional life policies) which have early cash values equal to (or nearly equal to) premiums paid. Purchase of a COLI policy avoids “the hit to earnings” because cash premiums paid are replaced by net cash surrender value on the business balance sheet.
Cash Values. The general rule is that net cash surrender values are carried on the balance sheet under “Noncurrent Assets,” as at A in the balance sheet below (“noncurrent assets” are also referred to as “other assets”). It has been suggested that with universal life containing surrender charges the full cash values should be carried as an asset. However, this is not consistent with the position taken by the Financial Accounting Standards Board in FASB Technical Bulletin No. 85-4, entitled “Accounting for Purchases of Life Insurance.” When responding to the question of how to account for an investment in life insurance, the bulletin states: “The amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset. . . . the current capacity to realize contract benefits is limited to settlement amounts specified in the contract” [emphasis added]. When it is intended to surrender a universal life policy value during the normal operating cycle, the surrender values might be carried on the balance sheet as a “Current Asset,” as opposed to a “Noncurrent Asset.”