The following sections describe some of the more common types of life insurance contracts and discuss a reporting entity’s accounting for its investment in these contracts.
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. There are several types of life insurance that provide different levels of participation in investment performance, including whole life, universal life, and variable life insurance policies.
Death benefits are typically exempt from taxes. In addition, the accumulation of value is often tax deferred until withdrawal, which can give life insurance investments an economic advantage over more traditional debt and equity investments. Unless the conditions in ASC 210-20-45-1 are met, a reporting entity should not offset a deferred compensation liability and an investment in the life insurance contract even when the policy is purchased in contemplation of funding employee benefits.
An investment in life insurance should be reported at the amount that could be realized under the contract at the balance sheet date, which includes the cash surrender value and any additional amounts realizable as discussed in ASC 325-30 less an allowance for credit losses. Investments in life insurance contracts are outside the scope of ASC 815; therefore, embedded derivative features should not be accounted for separately. The change in cash surrender value during the period and the premium paid determine the expense or income to be recognized in the period.
Some life insurance policies adjust the realizable amount if certain conditions apply. For example, a BOLI contract may have a different surrender value if there is a change in control or a tax net operating loss is incurred. Also the cash surrender value may be adjusted in early years for the tax effects of insurance company acquisition costs. If it is probable that contractual terms will limit the amount that could be realized under the life insurance contract, these contractual limitations should be considered when determining the realizable amounts.
Reporting entities often purchase group life insurance policies that cover a number of individual employees. The amount realizable under the contract may differ depending on whether an individual policy or the entire group contract is surrendered. When determining the realizable amount at the balance sheet date, reporting entities should assume that policies will be surrendered on an individual policy basis, rather than as a group of policies. See ASC 325-30-55 for an illustration of the calculation of the cash surrender value of a group policy.
Discounting cash surrender valueUnder ASC 325-30, amounts recoverable by the policyholder beyond one year from the surrender of the policy should be discounted. If the policyholder continues to participate in changes of the cash surrender value, the participation amounts should be projected and discounted using the rates that would have accrued if no surrender notice had been given. If the participation will be the same as before the surrender notice, no adjustment for discounting will be necessary. If the participation after the surrender notice is limited such as only in immunized or “safer” investments, discounting will be required.