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Accounting Treatment of Joint Life Policy in case of Death of a Partner

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  • Last Updated : 14 Dec, 2022
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What is Joint Life Policy?

Joint Life Policy like any other life policy gives coverage against the death of the policyholder, however, under Joint Life Policy the coverage is of a minimum of two persons and the pay-out is on a first-death basis. In the Partnership firm, the partners may hold the Joint Life Policy to reduce the burden of payment of a huge amount in the event of retirement or death of the partner. If any partner dies, the other partners are eligible to receive the policy amount (Full Claim). 

Accounting Treatment:

Accounting treatment of the Joint Life Policy can be done in any of the following ways:

1. Premium Method:

Under this method, the premium paid for the Joint Life Policy is treated as an expense and is written off against the profit/loss of the firm, like any other expenses. So, the policy amount is treated as a gain for the firm and is distributed among all the partners in their old ratio. This method is used when no information about the Joint Life Policy appears in the books of accounts. Further, it will not appear in the Balance Sheet of the firm.

Journal Entries:

A. Insurance claim received on the death of the partner:

 

B. Distribution of claim amount among all the partners in the old ratio:

 

Illustration:

Amit, Sumit, and Romit were partners in the firm sharing profits and losses in the ratio of 3: 2: 1. They took a Joint Life Policy worth ₹ 3,00,000. On 1st August 2021, Romit died in a car accident and the insurance company paid the full amount of the claim. Pass necessary Journal Entries when the amount of insurance is treated as an expense.

Solution:

 

2. Surrender Value Method:

This method is followed when the Joint Life Policy at surrender value appears on the asset side of the Balance Sheet. The balance of the insurance value is then distributed among all the partners in their old ratio.

Journal Entries:

A. Insurance claim received on the death of the partner:

 

B. Distribution of the balance of the claim amount among all the partners in the old ratio:

 

Illustration:

Anil, Ravi, and Rumi were partners in the firm sharing profits and losses in a ratio of 3: 3: 2. They took a Joint Life Policy worth ₹ 10,00,000. On 31st October 2021, Ravi died due to cardiac arrest. The surrender amount on this date was ₹ 2,00,000. Pass necessary Journal Entries and show the treatment of the Joint Life Policy Account in the Balance Sheet under the Surrender Value Method.

Solution:

 

3. Joint Life Policy Reserve Method:

 The joint Life Policy Reserve Method is opted when the partners decide to transfer the surrender value to a reserve known as Joint Life Policy Reserve. The Joint Life Policy Reserve is shown on the liability side of the Balance Sheet corresponding to the Joint Life Policy Account on the Asset side. Such Reserve is distributed among the partners in the old ratio in the event of the death of the partner.

Journal Entries:

A. Insurance claim received on the death of the partner:

 

B. Transferring the balance of the Joint Life Policy Reserve to Joint Life Policy Account:

 

C. Distributing the balance in the Joint Life Policy Account among all the partners in the old ratio:

 

Illustration:

Lalita, Sankar, and Sommi were partners in the firm sharing profits and losses in a ratio of 2: 4: 3. They took a Joint Life Policy worth ₹ 18,00,000. On 31st March, 2022 Lalita died. The surrender value of JLP on this date was ₹ 2,70,000. Pass necessary Journal Entries and show the treatment of the Joint Life Policy in the Balance Sheet when the firm decides to create the Joint Life Policy Reserve.

Solution:

 


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