Accounting for business-owned life insurance policies

June 9, 2014

What would happen to a corporation if the long-term CEO were to die? Some businesses carry life insurance policies for just such an event because of potential operation disruptions. In this article we’ll discuss briefly the journal entries for business-owned life insurance (BOLI) policies.

1. Business-owned life insurance premiums and the cash surrender value asset

When a business owns a life insurance policy (BOLI) for a key officer, it pays the premiums itself and names the actual business as the beneficiary should the officer die while the policy is in place. These premiums are considered standard business expenses, with a debit to an insurance expense account and a credit to cash or a payable. There’s one additional facet of BOLI accounting to consider - the FASB has determined that the value of the policy on the financial statement date should be included as a balance sheet asset. That value refers to the cash surrender value, NOT the possible benefit paid should the officer die in the future.

If the cash surrender value changes during the year, the change will reduce or increase insurance expense for the year, as shown by the following journal entry. We’ll assume that XYZ Corporation, a fictional entity, pays $3,000 for a $10,000,000 CEO life insurance policy. The cash surrender value increased from $21,900 to $22,700 this year.

Account Names

Debits

Credits

Insurance Expense

2,200

 

Insurance Cash Surrender Value

800

 

     Cash

 

3,000

Now let’s assume that, unfortunately, the CEO does in fact die the very next year, and the corporation collects the $10,000,000 death benefit. The company will debit cash for that amount while eliminating the accumulated cash surrender value account. A gain will be booked for the difference - note that this might qualify as an extraordinary gain to be reported separately on the income statement.

Account Names

Debits

Credits

Cash

10,000,000

 

     Insurance Cash Surrender Value

 

22,700

     Gain on Life Insurance

 

9,977,300

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