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Financial Accounting · Treatment of Joint Life Policy

Joint Life Policy Premium Treated as Expense

Updated 10 October 2026 · Fact-checked

When a joint life policy is treated as an expense, each year's premium is debited to Profit and Loss Account and shared by partners in the profit sharing ratio. No Policy Account or reserve is created. When the policy is claimed or surrendered, the whole amount received is a gain shared by the partners.

Understand Accounting for Premium: Policy as Expense

A joint life policy is an insurance policy taken by a firm on the lives of all partners. It is paid when one partner dies, or it can be surrendered earlier. Its purpose is to give the firm cash to pay the deceased partner's heirs.

There are two main ways to account for the premium. In the asset method, premiums are debited to a Policy Account and the policy is shown on the balance sheet. In the expense method, which this page covers, you simply treat the premium as a running cost of the firm.

Under the expense method, you debit the Profit and Loss Account with each premium paid. The cost is therefore borne by the partners year by year, in their profit sharing ratio. Nothing about the policy appears on the balance sheet, so there is no Policy Account and no Joint Life Policy Reserve.

Because the cost has already been charged to profit, the money received later has no matching asset to set against it. So when the policy matures, is claimed on a partner's death, or is surrendered, the entire amount received is a gain. You credit it to the partners' capital accounts in the profit sharing ratio that applies at that time, usually the old ratio before the change.

The key point for exams is the contrast with the asset method. In the asset method, the claim is compared with the Policy Account balance and only the difference is a gain. In the expense method, there is no balance to compare with, so the full claim is the gain.

Key rules to remember

Premium entry (expense method)
Profit and Loss A/c Dr. ; To Bank A/c (premium paid)
Charged every year. No Policy Account is opened and nothing is shown on the balance sheet.
Claim or surrender entry
Bank A/c Dr. ; To Partners' Capital A/cs (in the profit sharing ratio)
The whole amount received is a gain, since no asset or reserve exists against it.
Gain on policy
Gain = Total amount received (claim or surrender value)
In the asset method the gain is the amount received less the Policy Account balance. Here there is no balance to deduct.
Sharing of premium and gain
Share of each partner = Amount × partner's ratio
Use the ratio in force when the premium was charged and the ratio before the change when the claim arises, unless the question says otherwise.

How to solve Accounting for Premium: Policy as Expense questions

Follow these steps for any question where the joint life policy premium is treated as an expense.

  1. 1Read the question and confirm the policy is to be treated as an expense, with no Policy Account or reserve.
  2. 2Note the annual premium and pass the entry: debit Profit and Loss Account, credit Bank.
  3. 3Check the balance sheet given. If a Policy Account or reserve appears, the question is mixing methods, so read the instruction again.
  4. 4Find the claim or surrender value received and the date of the event, such as death or retirement.
  5. 5Pass the entry: debit Bank, credit the partners' capital accounts with the full amount in the old profit sharing ratio.
  6. 6If a partner has died, add the share of the policy gain to that partner's account before computing the amount due to the executors.
  7. 7Check that no Policy Account or reserve is created, and that the totals of the capital accounts agree with the balance sheet.

Quickest way: Expense method in three lines

When to use it: Use this when the question says the premium is written off to Profit and Loss, or that no policy account is to be maintained.

  1. Premium each year goes to Profit and Loss A/c. Nothing else changes.
  2. On claim or surrender, the full amount is a gain.
  3. Credit that full amount to the partners' capitals in the old ratio. No reserve is transferred.

Common mistakes in Accounting for Premium: Policy as Expense

  • Crediting only the excess over a Policy Account balance as gain.

    Students carry over the asset method, where the gain is claim less the Policy Account balance.

    Fix: In the expense method no asset exists. Credit the whole amount received to the partners' capital accounts.

  • Opening a Policy Account for the premium.

    Students assume every joint life policy must appear on the balance sheet.

    Fix: Read the instruction. If the premium is expensed, debit Profit and Loss and show no asset.

  • Sharing the gain in the new ratio after a partner leaves.

    Students use the latest ratio automatically.

    Fix: The gain belongs to the partners before the change. Use the old ratio unless the question states otherwise.

  • Transferring a Joint Life Policy Reserve that does not exist.

    Students memorise a standard entry from the reserve method.

    Fix: There is no reserve here. Only the claim entry is needed.

  • Forgetting to include the partner's share of the gain in the amount due to the deceased partner.

    The entry is made in the firm's books but not carried into the deceased partner's account.

    Fix: Credit each capital account first, then total the deceased partner's account.

  • Treating the premium as a drawing of the partners.

    Confusing a firm's expense with a personal payment.

    Fix: The firm pays the premium, so it is a business expense in Profit and Loss.

Worked examples

Example 1

A, B and C share profits in the ratio 3:2:1. The firm pays an annual premium of ₹12,000 on a joint life policy and treats it as an expense. Pass the entries for the premium and show how it is borne by the partners.

Show the solution
  1. Premium paid: Profit and Loss A/c Dr. ₹12,000 ; To Bank A/c ₹12,000.
  2. The loss reduces profit that is shared in the ratio 3:2:1.
  3. A bears 12,000 × 3/6 = ₹6,000.
  4. B bears 12,000 × 2/6 = ₹4,000.
  5. C bears 12,000 × 1/6 = ₹2,000.
  6. Check: 6,000 + 4,000 + 2,000 = ₹12,000.

Answer: Entry: Profit and Loss A/c Dr. ₹12,000 ; To Bank A/c ₹12,000. The cost is borne by A ₹6,000, B ₹4,000 and C ₹2,000. No asset or reserve is created.

Example 2

X, Y and Z share profits in the ratio 5:3:2. Premiums on the joint life policy have always been charged to Profit and Loss. Z dies and the insurer pays ₹5,00,000 on the policy. Pass the entry for the claim and find each partner's share.

Show the solution
  1. No Policy Account or reserve exists, so the whole claim is a gain.
  2. Entry: Bank A/c Dr. ₹5,00,000 ; To X's Capital A/c, Y's Capital A/c and Z's Capital A/c.
  3. Use the old ratio 5:3:2, total 10.
  4. X gets 5,00,000 × 5/10 = ₹2,50,000.
  5. Y gets 5,00,000 × 3/10 = ₹1,50,000.
  6. Z gets 5,00,000 × 2/10 = ₹1,00,000.
  7. Check: 2,50,000 + 1,50,000 + 1,00,000 = ₹5,00,000.

Answer: Bank A/c Dr. ₹5,00,000 ; To X's Capital ₹2,50,000, Y's Capital ₹1,50,000, Z's Capital ₹1,00,000. Z's ₹1,00,000 is added to the amount due to Z's executors.

Exam tips

  • Look for the phrase 'charged to Profit and Loss' or 'no policy account to be maintained'. It tells you the expense method applies.
  • Write a one-line note under your answer: 'Premium expensed, so full claim is a gain.' This shows the examiner you chose the method deliberately.
  • In MCQs, check whether the question asks for the gain or the entry. Under the expense method the gain equals the amount received.
  • In a death or retirement question, show the policy entry as a separate working before the settlement account, so you earn step marks.

Practice questions from Treatment of Joint Life Policy

Accounting for Premium: Policy as Expense in other exams

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

Accounting for Premium: Policy as Expense: frequently asked questions

When is the joint life policy premium charged to Profit and Loss?

It is charged when the firm decides, or the question states, that no asset or reserve is to be created. Each year's premium is then a normal expense debited to Profit and Loss and shared by partners in the profit sharing ratio.

What is the difference between joint life policy as asset and as expense?

As an asset, premiums go to a Policy Account and appear on the balance sheet, so the gain on claim is the excess over that balance. As an expense, premiums are written off each year and the whole claim is a gain.

How is the claim treated when the policy is an expense?

Debit Bank with the amount received and credit the partners' capital accounts in the profit sharing ratio. No Policy Account or reserve is involved.

Which ratio is used to share the claim amount?

Use the ratio that applied to the partners before the event, normally the old ratio. Follow any specific instruction in the question.