The cash surrender value of the life insurance policy is no longer an asset, so its balance must be removed from the B/S. The entry is balanced by recording a mortality gain on the income statement of the company.
Is insurance policy cash surrender value a current asset?
Examples of Other Current Assets The cash surrender value of life insurance policies, advances given to suppliers, and advances provided to workers are examples of other current assets. Since these residual accounts represent current assets, their balances must be converted to cash within a year or one business cycle.
What distinguishes liquid assets from fixed assets? – There are two types of assets: liquid and fixed. Liquid assets are assets that can be swiftly and readily exchanged to cash without depreciation in value. Checking and savings accounts are the most typical liquid assets since you may withdraw cash as required.
- For this reason, emergency funds are frequently maintained in savings or money market accounts.
- Other liquid investments include policies with a cash surrender value, savings bonds, equities, and certificates of deposit with no early withdrawal penalty.
- Fixed assets are less accessible than liquid assets since they are difficult to convert to cash.
A sale of fixed assets conducted in a hurry might result in a loss. Collections of art or antiques, jewels, and real estate, such as your house, are examples of fixed assets.
How is life insurance shown on a balance sheet?
5.1.2.1 Accounting for life insurance settlements – Investments in life settlement contracts are accounted for differently than the initial purchasers of life insurance. According to ASC 325-30-25, a third-party investor must account for its investments in life settlement contracts using either the investment method or the fair-value approach.
- The choice of coverage is irreversible and is made instrument-by-instrument at the time of purchase.
- Investment strategy The investment technique necessitates that the life settlement contract be initially recognized at the transaction price plus initial direct external costs paid to obtain the life settlement contract (e.g., broker fees, medical expenditures), minus predicted credit losses.
Capitalized expenses include premium payments and any direct external expenditures incurred to maintain the insurance. If facts or events suggest that the projected proceeds of the insurance policy would be less than the carrying value of the investment plus anticipated undiscounted future premiums and capitalizable direct external expenses, an investor should evaluate the life settlement contract for impairment.
A change in the insured’s estimated length of life would be a circumstance that would prompt an impairment evaluation. A change in the creditworthiness of the underlying insurance policy’s issuer will affect the credit loss reserve. A change in interest rates would not need an impairment test for an investment in a life settlement contract.
If an impairment loss is recorded, the investment should be written down to its current fair market value. Any premiums paid in the future would continue to be capitalized and added to the new basis, and the contract would remain subject to impairment testing.
Until the policy expires, no investment income is reported. At the insured’s demise, the difference between the carrying amount of the life settlement contract and the proceeds of its underlying life insurance policy is recorded as income. Fair-value method The fair-value approach acknowledges the initial investment in a life settlement contract at its transaction price, ignoring initial immediate external expenses, which are expensed when they are incurred.
At each reporting period thereafter, the investment is remeasured at fair value, and any changes in fair value are reflected in net income.
What kind of asset does cash surrender value represent?
What Is Cash Surrender Value? – Cash surrender value is the amount of money an insurance company pays a policyholder or annuity contract owner when a policy is voluntarily canceled prior to maturity or when an insured event occurs. This cash value is the savings component of the majority of permanent life insurance contracts, including whole life insurance.
Suitable accounting entries –
| Date | Account Names | Debit | Credit | Explanation | |
|---|---|---|---|---|---|
| Each year when the annual premium is paid, Aco’s accountant will debit the insurance expense and credit the chequing account. This same entry is made in each of years 1 through 14. | Insurance expense | $10,000 | To record the payment of annual insurance premium due | ||
| Chequing account | $10,000 | ||||
| At Aco’s year-end, the accountant will write an adjusting entry to reflect the year-over-year increase in the cash surrender value. | Year 1 | Cash surrender value | $3,000 | To record cash surrender value at the end of the first year | |
| Insurance expense | $3,000 | ||||
| Year 2 | Cash surrender value | $3,000 | To reflect the year-over-year increase in the cash surrender value | ||
| Insurance expense | $4,000 | ||||
| In year 12, the increase in the cash value ($14,000) of the life insurance policy is greater than the annual premium ($10,000). This means that on Aco’s income statement, there will be income of $4,000, rather than an expense. | Year 12 | Cash surrender value | $14,000 | To reflect the year-over-year increase in the cash surrender value | |
| Insurance expense | $14,000 | ||||
| In year 15, the company did not pay an annual premium but chose to use the policy’s internal value to fund the cost of insurance. There is still an increase in cash surrender value ($2,000) over the prior year, which needs to be recorded. | Year 15 | Cash surrender value | $2,000 | To reflect the year-over-year increase in the cash surrender value | |
| Insurance expense | $2,000 | ||||
| At the time of Ben’s death, Aco will receive a $1-million death benefit. The cash surrender value of the policy at the time of Ben’s death is $250,000. So $750,000 will appear on Aco’s income statement for the year. | Year 25 | Chequing account | $1,000,000 | To record receipt of $1 million of life insurance proceeds and to eliminate the $250,000 of cash surrender value sitting on Aco’s balance sheet | |
| Cash surrender value | $250,000 | ||||
| Other income | $750,000 |
James Kraft is the vice president of Wealth Planning Services at BMO Financial Group. The Master of Taxation Program at the University of Waterloo is directed by Deborah Kraft, MTax, TEP, CFP.