Life Insurance Accounting: Understanding The Basics

Life insurance accounting is a system of recording, analysing and reporting the financial status of life insurance companies. Life insurance companies hold a small percentage of their assets in preferred or common stock. Life insurance contracts are typically more predictable than other insurance contracts, as they are based on amounts stated in the contracts. Life insurance accounting is governed by a common set of standards, known as generally accepted accounting principles, or GAAP, established by the independent Financial Accounting Standards Board (FASB).

Corporate-owned life insurance (COLI)

Life insurance accounting is a system of recording, analysing and reporting an organisation's financial status.

COLI provides an accumulated contract value that increases over time. This means that the company will receive a larger payout the longer the policy is held. There is also an additional return upon the death of the insured. This means that the company will receive a payout when the insured person dies. This can be used to fund an obligation to redeem an ownership interest upon death. For example, if a company owner dies, the company may need to buy out their ownership interest from their estate. COLI can provide the funds to do this.

COLI can also be used to protect against the loss of key persons. This means that if a key employee or executive dies, the company will receive a payout that can be used to help cover the costs of finding and training a replacement. COLI can also be used to fund deferred compensation or post-retirement benefit arrangements. This means that the company can use the proceeds from the policy to pay for things like executive retirement plans or deferred compensation agreements.

Overall, COLI is a valuable tool for companies to manage their financial risks and plan for the future. It can provide financial protection in the event of the death of key personnel and can also be used to fund other types of benefit arrangements.

Bank-owned life insurance (BOLI)

Life insurance accounting is a system of recording, analysing and reporting an organisation's financial status. A reporting entity may purchase a life insurance policy to fund deferred compensation or post-retirement benefit arrangements, protect against the loss of key persons, or fund an obligation to redeem an ownership interest upon death.

BOLI policies can also be used to fund deferred compensation or post-retirement benefit arrangements for employees. In this case, the bank would purchase a BOLI policy on the life of an employee and name the employee as the beneficiary. The employee would then receive the death benefit upon the insured person's death, which can be used to fund retirement or other deferred compensation plans.

BOLI policies provide an accumulated contract value that increases over time, as well as an additional return upon the death of the insured. This means that BOLI policies can also be used as an investment vehicle, providing a source of income for the bank in addition to the death benefit.

The use of BOLI policies by banks is regulated by the Financial Accounting Standards Board (FASB), which establishes the generally accepted accounting principles (GAAP) that govern all corporate accounting and reporting in the United States. The FASB's guidance on BOLI policies includes requirements for balance sheet and income statement presentation, as well as disclosure of insurance activities.

Key-person life insurance

Life insurance accounting refers to the recording, analysing and reporting of an organisation's financial status in relation to life insurance contracts. A reporting entity may purchase a life insurance policy to protect against the loss of key persons. This type of insurance policy is referred to as key-person life insurance. It provides an accumulated contract value that increases over time and an additional return upon the death of the insured.

The policy is owned and paid for by the organisation, and the organisation is also the beneficiary of the policy. This means that in the event of the key person's death, the organisation receives the death benefit. The death benefit can be used to cover the costs associated with the loss of the key person, such as recruiting and training a replacement, or to provide financial stability during a difficult time.

The accumulated contract value of a key-person life insurance policy increases over time. This means that the longer the policy is in force, the higher the death benefit will be. The policy may also provide additional benefits, such as access to investment options or the ability to borrow against the policy's cash value.

Overall, key-person life insurance is an important tool for organisations to manage their risk and protect themselves from the financial impact of losing a key person. It provides peace of mind and financial stability during a challenging time.

Long-duration insurance contracts

Life insurance accounting is a system of recording, analysing and reporting an organisation's financial status. In the United States, all corporate accounting and reporting is governed by a common set of standards, known as generally accepted accounting principles, or GAAP, established by the independent Financial Accounting Standards Board (FASB).

Life insurance companies generally hold a small percentage of their assets in preferred or common stock. A reporting entity may purchase a life insurance policy to fund deferred compensation or post-retirement benefit arrangements, protect against the loss of key persons, or fund an obligation to redeem an ownership interest upon death. These types of insurance policies are referred to as corporate-owned life insurance (COLI), bank-owned life insurance (BOLI), and key-person life insurance. A life insurance contract provides an accumulated contract value that increases over time and an additional return upon the death of the insured.

ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12), revises key elements of the measurement models and disclosure requirements for long-duration insurance contracts issued by insurers and reinsurers. It is the biggest change in US GAAP for life insurers in the last 40 years. The FASB’s objective was to improve, simplify, and enhance accounting for long-duration contracts. This guide assumes that ASU 2018-12 has been adopted. ASC 944 Financial Services-Insurance (ASC 944) provides guidance on various elements of insurance transactions, focusing principally on:

Guidance is also provided on balance sheet and income statement presentation and disclosure of insurance activities.

Life insurance companies' assets

Life insurance companies are also subject to statutory accounting requirements, which include the preparation of a balance sheet, an income statement, and a Capital and Surplus Account. This financial reporting helps to ensure that life insurance companies maintain adequate assets to meet their obligations to policyholders.

Overall, the assets of life insurance companies are diverse and include a mix of financial instruments, investments, and insurance contract values. The specific mix of assets can vary depending on the company's business model, risk appetite, and regulatory requirements.

Frequently asked questions