Chapter 11 Flashcards
Death Benefits
Death benefits arise from all types of life insurance: industrial, ordinary, credit, and group. Although payments upon death can be made for annuities and supplementary contracts, they are not shown on this line, but are included on the appropriate annuity or supplementary contract benefit line.
- The incurred amount shown as Death benefits in the Summary of Operations equals:
Cash basis death proceeds paid (net of reinsurance)
+ current year liability
+ amounts due from reinsurers on paid losses (PY) - PY liability
- amounts due from reinsurers on paid losses (current year).
Accounting Process:
The current year liability for claims is shown on the Total line in the Policy and Contract Claims Exhibit, Part 1. These amounts are made up of claims that, for some reason (e.g., report occurring late in December) did not get paid prior to the end of the year. Amounts due from reinsurers on paid losses are shown on the Amounts recoverable from reinsurers December 31, current year line in the Exhibit.
Death Benefits
Effect of Reserves
policy has a reserve of $3,000
Db: Death proceeds-ordinary $10,000
Db: Dividends on deposit disbursed 1,000
Cr: Cash $11,000
What is the net gain from operations?
- On first appearance, one might think that this will cause the net gain from operations to be $11,000 lower. However, if the policy has a reserve of $3,000, the effect on the net gain is only $7,000, because the reserve liability of $3,000 and the dividend liability of $1,000 will no longer be shown on the balance sheet.
Matured Endowments
Endowment insurance pays the proceeds of the policy if the insured is living on the maturity date. Such endowments involve the industrial, ordinary, and group life lines of business and are shown on the Matured endowments line in the Summary of Operations.
Any current year liability is shown in the Policy and Contract Claims Exhibit, Part 1, and the current and previous year liabilities are shown in Part 2. Amounts due from reinsurers on paid losses are also shown in the Exhibit, Part 2.
- The incurred amount for Matured endowments in the Summary of Operations equals:
The incurred amount shown as Death benefits in the Summary of Operations equals:
Cash basis death proceeds paid (net of reinsurance)
+ current year liability
+ amounts due from reinsurers on paid losses (PY) - PY liability
- amounts due from reinsurers on paid losses (current year).
Annuity Benefits
- An annuity contract provides, either immediately or at some future date, periodic income payments to one or more persons, perhaps with a certain guaranteed number of payments or with a minimum guaranteed amount for those annuities involving life contingencies. As with death proceeds, endowments are either paid in cash or used to purchase a supplementary contract.
Disability Benefits
Disability benefits can take a variety of forms, one involves waiver of premiums if the insured, or the adult policyholder on juvenile insurance, becomes disabled.
Any disability benefits paid on industrial, ordinary life, credit life, or group life policies are included in the Policy and contract claims-life line in the Cash Flow Statement. Any such benefits paid on individual or group annuities are on the Annuity benefits line in the Cash Flow Statement.
Benefits Under Accident and Health Policies
The accident and health line of business is divided into three types for the Policy and Contract Claims Exhibit and the Analysis by Lines of Business Exhibit: group, credit, and other.
Coupons, Guaranteed Annual Endowments & Similar Benefits
Some life policies contain coupons or annual pure endowments. These endowment or coupon amounts are similar to dividends, with one major difference. Dividends are not guaranteed, but coupons and pure endowments are guaranteed, providing the policy premiums are paid when due.
because dividends are not guaranteed, whereas coupons and pure endowments are, the three are not shown together in the Summary of Operations.
Surrender Benefits
- The net cash value =
the guaranteed cash value of the policy,
+ the value of any dividends on deposit or the cash value of any paid-up additions, - any surrender charge and
- the value of any outstanding policy loan.
Group Conversions
Under the terms of group insurance policies, upon termination of the group insurance, the insured may have an option to convert, without evidence of insurability, to permanent individual insurance.
- Because of extra mortality (or morbidity), a charge is made against the group line of business, and a credit is made to the ordinary line.These charges and credits cancel out; however, the amounts appear in the Analysis of Operations by Lines of Business Exhibit, with the Total column being zero.
Interest on Policy or Contract funds
- Interest on policy or contract funds refers to items such as interest paid on proceeds from the date due to the date actually disbursed, and to interest on premium deposit funds.These interest items are reflected by the increase in reserves or liability, from
one year to the next.
Payments on Supplementary Contracts with Life Contingencies
- A supplementary contract arises when benefit proceeds (such as death, maturity, or surrender) are left with the company.
One such contract involving life contingencies provides for income until the death of the person receiving it. In addition, if the contract involves a certain period, income will continue to a second beneficiary for the remaining period (e.g., 10 years) even if the person originally receiving the income dies.
Accounting Process
Any liability is shown in the Policy and Contract Claims Exhibit, Part 1. The incurred entry appears in the exhibit Part 2, and the Summary of Operations entry equals the cash amount, plus current year liability, minus prior year liability.
Payments On Supplementary Contracts Without Life
Contingencies and of Dividend Accumulations
supplementary contract that does not involve life contingencies (mortality), either provides periodic payments for a certain number of years, or of a given amount until the proceeds are exhausted. Sometimes no periodic principal payments are made; the money just accumulates at interest.
A liability is established for dividend accumulations held on the behalf of the policyholder. Dividend accumulations arise from dividends to policyholders being left to accumulate at interest.When these amounts are withdrawn, the withdrawal reduces the liability and any interest paid on the account is reflected in the Summary of Operations.
Commissions on Premiums and Annuity Considerations
Commissions are those amounts paid to the sales force for the production of new business and the servicing of in-force business. Reported in the General Expenses Exhibit as commissions or as general expenses, even if they are determined as a percentage of premiums or of commissions.
As reported in Reinsurance Commissions and Expense Allowances and Commissions Incurred Exhibit, *commissions are split by first year, single, and renewal. Most commissions are a percentage of premium which varies by policy year. The first year commission is usually much greater than that for any renewal year.
General Insurance Expenses
The columns in the General Expenses Exhibit relate to:
•insurance (life, accident and health, and all other lines of business),
•investment, and
•total.
Each of the line column entries in General Expenses Exhibit is on an incurred basis.
The incurred investment total goes to Net Investment Income Exhibit and is reported indirectly in the Summary of Operations as a reduction to investment income.
General Insurance Expenses
SSAP No. 89, Accounting for Pensions
Costs related to service periods prior to an employee becoming eligible and vested are recognized in the period an employee becomes vested
