What is the tretment of Joint life policy premium?

Answer 1

A partnership firm may decide to take a Joint Life Policy on the lives of all partners. The firm pays the premium and the amount of policy is payable to the firm on the death of any partner or on the maturity of policy whichever is earlier. The objective of taking such a policy is to minimise the financial hardships to the event of payment of a large sum to the legal representatives of a deceased partner or to the retiring partner.

The accounting treatment for the premium paid and the joint life policy may be on any of the following ways:

1. When premium paid is treated as an expense:- When premium paid is treated as an expense the it is closed every year by transferring to profit and loss account. In this case complete amount received from the insurance company either on a surrender of policy or on the death of the partner becomes a gain.

Accounting entries are:

a. On payment of premium

Joint Life Policy insurance premium a/c ...Dr

To Bank A/c

b. On Charging to profit and loss account

Profit and Loss account ...Dr

To Joint Life Policy insurance premium a/c

c. On the maturity of the policy

Insurance company/ bank a/c ...Dr

To partner's capital a/c (individually)

{including the a/c of representative of deceased partner}

2. When premium paid is treated as an asset:- In this case insurance premium paid is first debited to life policy a/c and credited to bank a/c. At the end of the year the amount in excess of surrender value is treated as a loss and is transferred to profit and loss a/c. In this case the amount received from the insurance company inn excess of the surrender value results in a gain at the time of receipt of such amount which is transferred to Capital accounts of the partners in the profit sharing ratio.

3. Creation of Joint Life Policy:- Under this method, premium paid is debited to policy account and credited to bank a/c. At the end of the year, amount equal to premium is transferred from Profit and Loss Appropriation account to Policy reserve account. After this, policy account is brought down to its surrender value by debiting the life policy reserve account with amount which exceeds the surrender value of the policy. Thus, in this method, policy account appears on the asset side and policy reserve account appears on the liabilities side of the balance sheet until it is realised. This method is different from the method discussed in 2 only in respect of reserve account.

On the death of a partner Joint Life Policy Reserve Account is transferred to Joint Life Policy account and then the balance is transferred to Partner's capital accounts.