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Principles and Practice of Accounting > Death of a Partner > Joint Life Policy – Accounting Treatment
Death of a Partner

Joint Life Policy – Accounting Treatment

Joint Life Policy (JLP) is a policy which is decided by the partners of the firm on the joint lives of 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 sum to the legal representative of the deceased partner. The insurer receives the payout when after the death of his insure partner. There are different methods for the accounting treatment of Joint Life Policy. We will discuss these methods in this article.

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Joint Life Policy (JLP)

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.

Joint Life Policy Accounting Treatment Methods

The accounting treatment for Joint Life Policy at the time of the death of a partner is as follows:

  1. Premium Method
  2. Surrender Value Method
  3. Joint Life Policy Reserve Method

Joint Life Policy JLP

1. Premium Method

When the partners decide to treat the premium on Joint Life Policy as an expense and debit the Premium A/c to the Profit and Loss A/c 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.

Learn more about Calculation of Gaining Ratio here in detail.

The Journal Entries are:

Date Particulars Amount (Dr.) Amount (Cr.)
1. Insurance claim received on death Bank A/c Dr.
To Joint Life Policy A/c
(Being insurance claim received against the Joint Life Policy on the death of a partner)
2. Gain distributed Joint Life Policy A/c Dr.
To Partners Capital A/c (Individually)
(Being the amount received on Joint Life Policy treated as gain and distributed among the partners)

 

2. 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. The Journal entries will be:

Date Particulars Amount (Dr.) Amount (Cr.)
1. Insurance claim received on death Bank A/c Dr.
To Joint Life Policy A/c (claim amount)
(Being insurance claim received against the Joint Life Policy on the death of a partner)
2. Gain distributed Joint Life Policy A/c (balance in JLP) Dr.
To Partners Capital A/c (Individually)
(Being the balance amount in the Joint Life Policy A/c distributed among the partners)

 

3. Joint Life Policy Reserve Method

The partners may maintain the Joint Life Policy A/c as well as the Joint Life Policy Reserve A/c. Thus, under this method, both Joint Life Policy A/c and Joint Life Policy Reserve A/c appear at surrender value on the Assets and Liabilities side of the Balance Sheet, respectively. At the time of the death of a partner, the journal entries are:

Date Particulars Amount (Dr.) Amount (Cr.)
1. Insurance claim received on death Bank A/c Dr.
To Joint Life Policy A/c (claim amount)
(Being insurance claim received against the Joint Life Policy on the death of a partner)
2. Gain distributed Joint Life Policy A/c (balance in JLP) Dr.
To Partners Capital A/c (Individually)
(Being the balance amount in the Joint Life Policy A/c distributed among the partners)
3. JLP Reserve distributed Joint Life Policy Reserve A/c Dr.
To Partners Capital A/c (Individually)
(Being the balance amount in the Joint Life Policy Reserve A/c distributed among the partners)

 

Solved Example For You

Ajit, Babu, and Palak are partners sharing the profits and losses in the ratio of 3:2:1. They took a Joint Life Policy for ₹120000. Palak dies on 31st March 2017. The insurance company pays the full amount of the claim. The surrender value of the policy on 31st March 2017 is ₹30000. Pass necessary journal entries as per the following methods:

  1. Premium Method
  2. Surrender Value Method
  3. Joint Life Policy Reserve Method

Ans:

1. Premium Method

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
31 Mar’18 Bank A/c Dr. 120000
To Joint Life Policy A/c 120000
(Being insurance claim received against the Joint Life Policy on the death of Palak)
31 Mar’18 Joint Life Policy A/c Dr. 120000
To Ajit’s Capital A/c 60000
To Babu’s Capital A/c 40000
To Palak’s Capital A/c 20000
(Being the amount received on Joint Life Policy treated as gain and distributed among the partners)

2. Surrender Value Method

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
31 Mar’18 Bank A/c Dr. 120000
To Joint Life Policy A/c 120000
(Being insurance claim received against the Joint Life Policy on the death Palak)
31 Mar’18 Joint Life Policy A/c Dr. 90000
To Ajit’s Capital A/c 45000
To Babu’s Capital A/c 30000
To Palak’s Capital A/c 15000
(Being the balance amount in the Joint Life Policy A/c distributed among the partners)

 

3. Joint Life Policy Reserve Method

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
31 Mar’18 Bank A/c Dr. 120000
To Joint Life Policy A/c 120000
(Being insurance claim received against the Joint Life Policy on the death Palak)
31 Mar’18 Joint Life Policy A/c Dr. 90000
To Ajit’s Capital A/c 45000
To Babu’s Capital A/c 30000
To Palak’s Capital A/c 15000
(Being the balance amount in the Joint Life Policy A/c distributed among the partners)
31st Mar Joint Life Policy Reserve A/c Dr. 30000
To Ajit’s Capital A/c 15000
To Babu’s Capital A/c 10000
To Palak’s Capital A/c 5000
(Being the balance amount in the Joint Life Policy Reserve A/c distributed among the partners)

 

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