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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 1st 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 31st December every year is as follows:
| Year | Surrender Value |
| 2013 | Nil |
| 2014 | 1800 |
| 2015 | 4000 |
| 2016 | 7200 |
FAQs on Joint Life Policy – Accounting Treatment - Commerce
| 1. What is a joint life policy? |  |
Ans. A joint life policy is an insurance policy that covers the lives of two individuals, typically spouses or business partners, under a single policy. The policy pays out a death benefit upon the death of either insured person, and the coverage typically terminates after the first death.
| 2. How should a joint life policy be accounted for? | |
Ans. The accounting treatment for a joint life policy depends on the purpose of the policy. If the policy is purchased for personal reasons, such as family protection, it is generally not accounted for on the balance sheet. However, if the policy is purchased for business purposes, such as key person insurance, it may be recorded as an asset on the balance sheet.
| 3. Can a joint life policy be transferred to another party? | |
Ans. Yes, a joint life policy can be transferred to another party, but it is subject to certain conditions and requirements. The transfer usually requires the consent of all insured parties and the approval of the insurance company. Additionally, there may be tax implications associated with the transfer.
| 4. What happens to a joint life policy in case of divorce or business dissolution? | |
Ans. In the event of divorce or business dissolution, the joint life policy can be terminated or modified. The policy may be surrendered, and the surrender value can be divided between the insured parties. Alternatively, the policy can be assigned to one party, with the other party removed as a beneficiary.
| 5. Can a joint life policy be converted into separate policies? | |
Ans. Yes, it is possible to convert a joint life policy into separate policies for each insured individual. This conversion may be subject to the approval of the insurance company and may require additional underwriting. Each individual policy would then have its own premium and coverage terms.
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Sep 23, 2025
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