Financial Accounting · Treatment of Joint Life Policy

Joint Life Policy in Partnership: Meaning and Features

Updated 10 October 2026 · Fact-checked

A joint life policy (JLP) is one insurance policy taken by a partnership firm on the lives of all its partners. The firm pays the premium and receives the policy amount when a partner dies. It gives the firm cash to pay the deceased partner's dues. If a partner retires, the firm may either keep the policy or surrender it for its surrender value, depending on the question.

Understand Joint Life Policy: Meaning and Features

A partnership firm often has to pay a large sum to a partner who dies or retires. The firm may not have that much cash ready. Paying it out of working capital can disturb the business. A joint life policy solves this problem.

In a joint life policy, the firm takes a single policy covering the lives of all partners. The firm pays the premium, and the firm is the policy holder and nominee. The policy amount (sum assured) is paid to the firm when any one partner dies. The firm then uses that cash to settle the deceased partner's share.

When a partner retires, the policy does not pay out. The remaining partners may keep the policy running, or the firm may surrender it to the insurer and receive the surrender value. Follow what the question directs. The surrender value is the amount the insurer pays for ending the policy early. It is usually lower than the total premiums paid. Its amount is given in the question.

The key accounting question is how to show the premium. In books, the premium can be treated in two ways.

Expense method: the premium is charged to Profit and Loss Account every year. No asset is created and no policy balance appears in the balance sheet. When the policy is surrendered or claimed, the entire amount received is a gain. It is credited to the partners' capital accounts in the old ratio, either directly or through a Joint Life Policy A/c opened only as a transit account and closed at once.
Asset method: the premium is debited to a Joint Life Policy Account (an asset) and the account is shown in the balance sheet at the premiums paid (less any amount written off), unless the question says otherwise. The balance may differ from the surrender value. The difference is shared among the partners in the old ratio when the policy is surrendered or claimed. The reserve method is a separate treatment and is covered in its own topic.

This page covers the meaning and features. The detailed accounting treatments follow in the related topics on premium, reserve method and claim settlement.

Key rules to remember

Premium treated as expense: Dr. Profit and Loss A/c ; Cr. Bank A/c (with premium paid); No asset is created and no policy balance appears in the balance sheet. On surrender or death, the entire amount received is credited to the partners' capital accounts in the old ratio, directly or through a Joint Life Policy A/c used only as a transit account.
Premium treated as asset: Dr. Joint Life Policy A/c ; Cr. Bank A/c (with premium paid); The premium is not expensed. The policy account is shown at the premiums paid (less any amounts written off), unless the question says otherwise. The reserve method is a separate treatment.
Surrender value received: Dr. Bank A/c ; Cr. Joint Life Policy A/c (surrender value); Used only if the firm surrenders the policy, for example on retirement when the question directs it. Otherwise the policy may continue. The difference between the surrender value and the policy account balance is shared by all partners in the old ratio. Under the expense method there is no balance, so the whole surrender value is credited to the partners' capital accounts, directly or via a transit Joint Life Policy A/c.
Policy amount received on death: Asset method: Dr. Bank A/c ; Cr. Joint Life Policy A/c (sum assured). Expense method: Dr. Bank A/c ; Cr. Partners' Capital A/cs in the old ratio (or Cr. Joint Life Policy A/c as a transit account only, then closed to the capital accounts); Under the asset method, transfer the policy account balance to the partners' capital accounts in the old ratio; any excess of the sum assured over the balance is a gain shared by all partners, including the deceased. Under the expense method, the whole sum assured is the gain, because no policy balance exists.
Excess of policy account over surrender value: Loss = Balance in Joint Life Policy A/c − Surrender value; Debit partners' capital accounts in the old profit sharing ratio, with a credit to the policy account.

How to solve Joint Life Policy: Meaning and Features questions

Use this method for any question that mentions a joint life policy, whether it asks for meaning, treatment or the entry.

1Read the question and find the sum assured, the annual premium, the surrender value and the number of years.
2Check whether the policy account is carried as an asset in the balance sheet, or whether premiums were written off to Profit and Loss.
3If the policy is an asset, note its balance. If premiums were expensed, there is no balance sheet balance for the policy.
4Identify the event: partner's retirement or partner's death, or just the running of the firm.
5On death, record the policy amount received. On retirement, see whether the question says to surrender the policy or keep it. If it is surrendered, record the surrender value received.
6Compare the amount received with the policy account balance (asset method). The difference is a profit or loss for all partners. Under the expense method, the whole amount received is a gain.
7Pass the adjustment entry in the old profit sharing ratio, and close the policy account.
8Check that the policy account shows nil after the entries.

Quickest way: Three-line check for JLP questions

When to use it: Use this when time is short and the question gives the policy account balance and the amount received.

Write the amount received: sum assured on death, or surrender value if the question says the policy is surrendered.
Subtract the policy account balance. If the result is positive, it is a gain; if negative, a loss. If the premiums were expensed, the whole amount is a gain.
Share the gain or loss among all partners in the old ratio, and close the policy account to nil.

Common mistakes in Joint Life Policy: Meaning and Features

Thinking the policy is on only one partner's life.
The word 'joint' is confused with 'joint account' or the name of an individual policy.
Fix: Remember it is one policy covering all partners, taken and paid for by the firm.
Calling the premium a personal expense of the partners.
Students link life insurance with personal expenses.
Fix: The firm pays the premium from firm funds. It is a firm expense or an asset, not a drawing, unless the question says it was paid by a partner.
Treating surrender value as equal to the premiums paid.
Students assume the insurer returns all premiums.
Fix: Always use the surrender value stated in the question. It usually differs from the total premiums paid.
Sharing the policy gain or loss only among continuing partners.
The retiring or deceased partner is forgotten after the event.
Fix: The policy was built up while all partners were in the firm. Share the gain or loss among all partners, including the one leaving, in the old ratio.
Leaving a balance in the policy account after surrender or claim.
Only the cash entry is passed, not the adjusting entry.
Fix: After receiving cash, transfer the difference to partners' capital accounts so the policy account is closed to nil.

Worked examples

Example 1

State what a joint life policy is. Explain two reasons why a partnership firm takes it. (Written answer, 6 marks style.)

Show the solution

Definition: a joint life policy is a single insurance policy taken by the firm on the lives of all its partners, with the firm paying the premium.
Reason 1: when a partner dies, the firm receives the policy amount and can pay the deceased partner's dues without disturbing working capital.
Reason 2: if a partner retires, the firm may keep the policy or surrender it for its surrender value, which can help meet the payment to the retiring partner.
Mention that the premium is treated either as an expense or as an asset called Joint Life Policy Account.

Answer: A joint life policy is one policy on the lives of all partners, paid for by the firm. Firms take it to have ready cash to settle a deceased partner's dues, and it can also be surrendered for its surrender value when a partner retires, if the firm chooses.

Example 2

X, Y and Z share profits in the ratio 3:2:1. The firm's balance sheet shows Joint Life Policy at ₹60,000. Z retires and the policy is surrendered for ₹48,000. Pass the entries.

Show the solution

Amount received on surrender = ₹48,000.
Policy account balance = ₹60,000.
Loss on surrender = 60,000 − 48,000 = ₹12,000.
Share the loss in the old ratio 3:2:1: X = 12,000 × 3/6 = ₹6,000; Y = 12,000 × 2/6 = ₹4,000; Z = 12,000 × 1/6 = ₹2,000.
Entry 1: Bank A/c Dr. ₹48,000 ; To Joint Life Policy A/c ₹48,000.
Entry 2: X's Capital A/c Dr. ₹6,000 ; Y's Capital A/c Dr. ₹4,000 ; Z's Capital A/c Dr. ₹2,000 ; To Joint Life Policy A/c ₹12,000.
Check: policy account credits 48,000 + 12,000 = 60,000, which clears the balance.

Answer: Bank is debited ₹48,000. The loss of ₹12,000 is charged to the capital accounts of X, Y and Z at ₹6,000, ₹4,000 and ₹2,000. The policy account closes to nil.

Exam tips

Write the definition in one line first. Examiners give marks for 'one policy on all partners, premium paid by the firm'.
In numerical questions, always check whether the policy appears as an asset in the balance sheet or was written off earlier.
Use the old profit sharing ratio for any gain or loss on the policy, and show the working in the answer.
In MCQs, look for the trap options: policy on one partner, premium paid by partners, or surrender value equal to premiums paid.
Close the policy account to nil and show the entry clearly so you earn step marks even if one figure is wrong.

Practice questions from Treatment of Joint Life Policy

Joint Life Policy: Meaning and Features: frequently asked questions

What is a joint life policy in a partnership firm?

It is one insurance policy that a firm takes on the lives of all its partners. The firm pays the premium and receives the amount when a partner dies. It helps the firm pay the deceased partner's dues.

Why do partnership firms take a joint life policy?

A firm may have to pay a large amount to a partner who dies or retires. The policy gives the firm cash for this purpose. This protects the working capital of the business.

What is surrender value in a joint life policy?

It is the amount the insurer pays when the firm ends the policy before maturity or death. It is stated in the question. It is usually lower than the total premiums paid.

Who gets the benefit of the policy amount received on death?

The policy is held by the firm, so the sum assured is received by the firm in full. The gain over the policy account balance (the whole amount under the expense method) is credited to all partners' capital accounts in the old profit sharing ratio. The deceased partner's capital balance, which includes his share of this gain, is then paid to his legal representatives.