CMA Intermediate · Financial Accounting

Treatment of Joint Life Policy for CMA Inter

A joint life policy is one insurance policy taken on the lives of all partners, so the firm gets money when any partner dies. You solve questions by choosing the premium method (asset or expense), creating a Joint Life Policy Reserve if asked, and then settling the claim or surrender value on death or retirement.

What this chapter covers

This chapter deals with one specific item in partnership accounts: the joint life policy (JLP). A firm insures the lives of all its partners under a single policy. When a partner dies, the insurer pays the firm. That money helps the firm pay the deceased partner's heirs without straining its cash.

The chapter is mostly about accounting entries. You learn three treatments of the yearly premium: show the policy as an asset, charge the premium to the Profit and Loss Account as an expense, or build a Joint Life Policy Reserve. Then you learn what happens in the books when a partner dies, or when a partner retires and the policy is either surrendered or kept.

It connects directly to the rest of partnership accounting in Financial Accounting: admission, retirement, death of a partner, goodwill, revaluation, and the final settlement of the partner's capital account. A JLP is often one adjustment inside a larger death or retirement problem, so you need this chapter to finish those sums correctly.

The chapter is short and rule-based, so it rewards clear practice. The entries repeat from question to question, and a small mistake in the policy or reserve treatment spoils the final settlement figure. It is also easy to get an MCQ wrong by mixing up the methods. The JLP adjustment also appears inside larger partnership problems, so mastering it protects marks in longer answers and gives you step marks even when a sum is long.

Treatment of Joint Life Policy: topics in the order to study them

1Joint Life Policy: Meaning and FeaturesYou need the idea of who is insured, who pays the premium and who receives the claim before any entry makes sense.
2Accounting for Premium: Policy as Asset (Policy A/c)This is the simplest method; the policy is carried at the premiums paid and the entries are easy to follow.
3Accounting for Premium: Policy as ExpenseIt is the contrast case: the premium goes to Profit and Loss, so the policy has no balance. The whole claim, when received, is a gain credited to all partners, including the deceased, in their profit-sharing ratio.
4Joint Life Policy Reserve MethodThis builds on the asset method. The premium is debited to the Policy A/c (Policy A/c Dr to Bank). Each year an amount equal to the premium is also charged to the Profit and Loss (Appropriation) A/c and credited to the JLP Reserve (Profit and Loss (Appropriation) A/c Dr to JLP Reserve A/c). So the reserve is built out of profits. As normally taught, the policy is carried at premiums paid, so the policy and the reserve stand at the same figure on the balance sheet. In the surrender-value variant, the policy is shown at its surrender value instead, and then the policy and the reserve differ. Learn it after you are sure of the Policy A/c.
5Death of a Partner: Policy Claim and SettlementOnce the three methods are clear, you can apply them to a death claim and the heirs' payment.
6Policy Surrender on Retirement and Other CasesWhen a partner retires, the policy may be surrendered or kept. If it is surrendered, you use the surrender value the insurer pays instead of the full claim, and compare it with the book value.

How to prepare Treatment of Joint Life Policy

Treat this chapter as a set of entries you can recite, then test yourself on mixed problems.

Read the meaning of a joint life policy and write in your own words who pays, who is insured and who receives the claim.
Write the journal entries for each premium method side by side on one page, so the differences stay visible.
Practise the reserve method until you can say what happens to the reserve on the death of a partner without looking.
Solve death-of-a-partner problems and show every step: claim received, policy or reserve cleared, balance shared among partners in their profit-sharing ratio.
Solve a retirement problem where the policy is surrendered for a value and compare it with the book value.
Finish with MCQs that test which method is used and what the balance sheet shows. Check each wrong answer against the entry.

Common mistakes in Treatment of Joint Life Policy

Mixing up the premium methods and using the asset-method entry for an expense-method question.
Fix: Underline the method in the question first, then write its premium entry before doing anything else.
Crediting the whole claim to the deceased partner's account.
Fix: Remember the firm is the beneficiary. The claim goes to the firm's bank. The whole gain or reserve is credited to all partners, including the deceased, in the profit-sharing ratio. The deceased's share then forms part of the amount due to his heirs.
Forgetting to close the policy or reserve after the claim.
Fix: After each claim, check that Policy A/c and Reserve show nil in the balance sheet, apart from any balance you transfer.
Sharing the gain in the wrong ratio, such as the capital ratio or the surviving partners' ratio.
Fix: Use the old profit-sharing ratio for all partners, including the one who died or retired, unless the question says otherwise.
Ignoring the surrender value and using the full policy amount on retirement.
Fix: Ask whether a death has occurred. If not, use only the surrender value that the insurer pays.

Last-day revision: Treatment of Joint Life Policy

A joint life policy covers all partners in one policy, and the firm is the beneficiary.
Premium is paid by the firm, not by individual partners.
Asset method: debit Policy A/c, credit Bank for each premium.
Expense method: debit Profit and Loss A/c, credit Bank; the policy shows no balance.
Reserve method: the premium is debited to the Policy A/c (Policy A/c Dr to Bank). Each year an amount equal to the premium is transferred from profits (Profit and Loss (Appropriation) A/c Dr to JLP Reserve A/c). As normally taught, the policy is carried at premiums paid, so the policy and the reserve stand at the same figure. In the surrender-value variant, the policy is shown at its surrender value, so the policy and the reserve then differ. The reserve is not equal to the sum assured. It is a credit balance of the partners' funds, not an outside liability.
On death, the full claim amount is received from the insurer.
Asset method on death: Bank A/c Dr (claim received), to Policy A/c (book value), to Partners' Capital A/cs (excess of claim over book value, in the profit-sharing ratio). The Policy A/c is closed.
Under the expense method, the entire claim is shared among all partners, including the deceased, in their profit-sharing ratio.
Under the reserve method, on death pass: Bank A/c Dr (claim received), to Policy A/c (book value, whether carried at premiums paid or at surrender value), to Partners' Capital A/cs (excess of claim over book value, in the profit-sharing ratio). Then transfer the reserve: JLP Reserve A/c Dr, to Partners' Capital A/cs in the profit-sharing ratio.
When a partner retires, the policy may be surrendered or kept. If it is surrendered, compare the surrender value received with the policy book value. Under the asset method, pass: Bank A/c Dr (surrender value), to Policy A/c (book value), to Partners' Capital A/cs (gain; if there is a loss, debit the Partners' Capital A/cs), shared in the old ratio. Under the reserve method, pass the same entry for the surrender value, book value and gain or loss, and also pass: JLP Reserve A/c Dr, to Partners' Capital A/cs in the old ratio. So the reserve goes to all partners, and only the surrender value minus the policy book value is treated as a profit or loss.
The whole gain or reserve is credited to all partners, including the deceased, in the profit-sharing ratio. The deceased partner's share forms part of the net amount due to his heirs.

Treatment of Joint Life Policy practice questions

Treatment of Joint Life Policy in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Treatment of Joint Life Policy: frequently asked questions

What is a joint life policy in partnership accounts?

It is a single insurance policy taken by the firm on the lives of all its partners. The firm pays the premium and receives the amount when a partner dies. This helps it pay the heirs without disturbing its cash.

Which premium method is best for exams?

Use the method the question names. If none is named, state your assumption clearly and apply it consistently. Always state the method you have used in your answer so the examiner can follow your entries.

Why is a Joint Life Policy Reserve created?

The reserve spreads the cost of the premiums over the years by charging them to Profit and Loss, while the policy stays on the balance sheet as an asset. The matching reserve shows that the policy value belongs to the partners. It is a credit balance of partners' funds, not a liability. On death it is distributed to the partners in their profit-sharing ratio.

Is this chapter useful for MCQs?

Yes. MCQs often ask what happens to the policy account on death, or which entry is passed under a given method. Knowing the three methods side by side helps you answer quickly and avoid the common traps.