Joint Life Policy – Accounting Treatment

The partners of a firm may decide to take a Joint Life Policy on the lives of all the partners of the firm. The partners take this policy with the aim to reduce the financial burden on the firm at the time of payment of a large sum to the retiring partner.

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Joint Life Policy – Accounting Treatment

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 methods of accounting for Joint Life Policy are:

Premium Paid is treated as an Expense

When the partners decide to treat the premium on Joint Life Policy as an expense, then they debit the Premium A/c to the Profit and Loss A/c every year to close it. In this situation, the full amount of policy received from the Insurance Company becomes a gain.

Journal Entries are:

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. Payment of Premium	Joint Life Policy Insurance Premium A/c	Dr.	XXX
	To Bank A/c	Cr.		XXX
	(Being joint life insurance premium paid)
2. Transfer to Profit and Loss A/c	Profit and Loss A/c	Dr.	XXX
	To Joint Life Policy Insurance Premium A/c	Cr.		XXX
	(Being Joint Life Policy Insurance Premium transferred to Profit and Loss A/c)
3. On maturity of Policy	Insurance Company / Bank A/c	Dr.	XXX
	To Partners’ Capital A/c (individually)	Cr.		XXX
	(Being the maturity amount credited to all the partners in case of surrender or maturity)

 

Premium Paid is treated as an Asset

In this situation, partners debit the amount of insurance premium to Joint Life Policy A/c and credit to Bank A/c. Then they find out the surrender value at the end of each year.

They treat any amount standing in the Joint Life Policy A/c in excess of the surrender value as a loss and transfer it to the Profit and Loss A/c. Thus, they treat any receipt from the Insurance Company in excess of the surrender value as a gain. This gain is then transferred to the Partner’s Capital Accounts in their profit sharing ratio.

When the Joint Policy Reserve Account is created

In this case, we debit the amount of premium to Joint Life Policy A/c and credit it to Bank A/c. At the end of the year, we debit the Profit and Loss Appropriation A/c with an amount equal to the amount of premium and credit the same to the Joint Life Policy Reserve A/c.

Afterwards, we debit the amount in excess of surrender value to the Joint Life Policy Reserve A/c and credit Joint Life Policy A/c with the same amount.

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, respectively. At the time of the surrender of the policy, firstly transfer the Joint Life Policy Reserve A/c to the Joint Life Policy A/c and then transfer the balance, if any, to the Partners’ Capital Accounts.

Solved Example on Joint Life Policy

Naira, Naksh, and Kirti are partners sharing profits and losses in the ratio of 5:3:2. Kirti retires on 1^st April 2017. They took a Joint Life Policy in 2013 for ₹100000. Annual Premium is ₹6000 payable on 1 June every year. The surrender value of the policy on 31^st December every year is as follows:

Year	Surrender Value
2013	Nil
2014	1800
2015	4000
2016	7200

 

Prepare necessary accounts assuming the partners maintain Joint Life Policy A/c on the Surrender Value basis.

Ans:

Joint Life Policy A/c

Date	Particulars	Amount		Date	Particulars	Amount
1 Jun’13	To Bank A/c	6000		31 Dec’13	By Profit &Loss A/c	6000
		6000				6000
1 Jun’14	To Bank A/c	6000		31 Dec’14	By Profit &Loss A/c	4200
					By Balance c/d	1800
		6000				6000
1 Jan’15	To Balance b/d	1800		31 Dec’15	By Profit &Loss A/c	3800
1 Jun’15	To Bank A/c	6000			By Balance c/d	4000
		7800				7800
1 Jan’16	To Balance b/d	4000		31 Dec’16	By Profit &Loss A/c	2800
1 Jun’16	To Bank A/c	6000			By Balance c/d	7200
		10000				10000
1 Jan’17	To Balance b/d	7200		1 Apr’17	By Bank A/c	7200
		7200				7200

 

Profit and Loss A/c

Date	Particulars	Amount		Date	Particulars	Amount
31 Dec’13	To Joint Life Policy A/c	6000
31 Dec’14	To Joint Life Policy A/c	4200
31 Dec’15	To Joint Life Policy A/c	3800
31 Dec’16	To Joint Life Policy A/c	2800