[Anonymous]

How does interest expense decrease if cash surrender value increases? Per investopedia, “The sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs.” So before it actually occurs, shouldn’t this just be disclosed instead of affecting interest expense?

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An increase in the cash surrender value of a life insurance policy owned by a company would be recorded by:

A. decreasing annual insurance expense.

B. increasing investment income.

C. recording a memorandum entry only.

D. decreasing a deferred charge.

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Typical journal entry for payment of life insurance premiums (no increase in cash surrender value):

Dr. Cr.

Insurance expense xx

Cash xx

As the cash surrender value of the policy started to increase, the typical journal entry for payment of life insurance premiums would become:

Dr. Cr.

Cash surrender value of life insurance x

Insurance expense xx

Cash xx

[Anonymous]

It decreases because you are still paying the same amount of premium, but now a part of it is a cash surrender value so something's gotta give.

Let's say a premium is $100. If there is no cash surrender value, you just credit cash 100 and debit expense 100

If surrender value is 20:

DR expense 80

DR cash surrender value 20

Cash 100

[NfalconsE35]

Please refer to my help on a similar question and refer specifically to the dividend entry:

Help with Cash Surrender Value Problem

Also, in accordance with FAS 157, insurance policies are carried as level 3 investments at fair market value which is typically the cash surrender value. Therefore this is not a disclosure only issue, as these policies are carried as actual investment assets which is why accounting for the cash value is important from the company's perspective who holds insurance policies.

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[Author]

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