Chapter 7

Question 1

Policyholders’ Dividends Due and Unpaid

Reasons?

Answer 1

*
• Premium payment transactions not recorded within the last processing cycle for the reporting period.

• All premiums not paid to the anniversary date.
• The policy anniversary date is near the end of the calendar year and the policyholder has elected to receive dividends in cash, but the cash dividend has not yet been disbursed.
• The policy anniversary date is near the end of the calendar year and the policyholder has elected to have the dividend reduce the premiums, but the premium for the next policy year has not yet been received.

Question 2

Accounting for Dividend Accumulation Transactions

Accounting to leave dividends on deposit:

Answer 2

• debit the appropriate disbursement account, i.e., dividends to policyholders,
• credit a liability account for the amount of the dividend left to accumulate at interest.

Question 3

Liabilities for Deposit-Type Contracts

Supplementary Contracts Without Life Contingencies

Answer 3

Supplementary contracts arise from the termination of a life insurance contract that has been terminated by death, maturity, or surrender, and the transfer of proceeds to the supplementary contract account.

• Under supplementary contracts, the insurance proceeds are held by the insurer and paid in some manner other than an immediate lump sum.
• The amount of each payment is computed on the basis of the assumed (or guaranteed) interest rate and the number and frequency of payments selected. For example, the higher the assumed interest rate, the larger the amount of each payment.

payment options
• To receive a guaranteed fixed number of payments.

• To receive payments of a certain amount until the proceeds are exhausted.
• To leave the proceeds with the insurer to earn interest with payment to be made at a later date.

If a contractholder who has left supplementary contract proceeds at interest dies, such proceeds would be paid in a lump sum to a named beneficiary or to the contractholder’s estate.

Question 4

Liabilities for Deposit-Type Contracts

Accounting for Supplementary Contract Transactions

Answer 4

• debit to the appropriate benefit payment account
• credit to a liability account to record the deposit.

The insurer’s Summary of Operations also reflects a decrease in policy reserves for an amount equal to the reserve that had been held on the terminated insurance policy.

Question 5

Liabilities for Deposit-Type Contracts

Structured Settlements

Answer 5

are agreements characterized by the periodic payment of fixed amounts to a claimant in connection with the settlement of a legal claim.

Payments may last for the lifetime of the payee or they may be for a particular period of time.

The party responsible for making structured settlement payments may make payments directly to a claimant.

Accounting treatment is similar to supplementary contracts without life contingencies.
• debit to the appropriate benefit payment account

• credit to a liability account to record the deposit.

Question 6

Liabilities for Deposit-Type Contracts

Retained Asset Accounts

Answer 6

It is used primarily to pay life insurance proceeds on the settlement of a death claim. Some insurers also use it to distribute other lump sum payments such as surrenders, pensions, and matured endowments.

• When a retained asset account is established in the place of a cash settlement, an interest bearing account is created by the insurer for the beneficiary. Beneficiaries can be provided additional time to consider their needs and investigate prudent financial alternatives while the insurance proceeds are earning interest.The account holder can make partial or total withdrawal of the account balance as needed and has total control over the account.

Question 7

Liabilities for Deposit-Type Contracts

Accounting for Retained Asset Transactions

Answer 7

Accounting treatment is similar to supplementary contracts without life contingencies.
• debit to the appropriate benefit payment account

• credit to a liability account to record the deposit (retained asset liability)

Question 8

Liabilities for Deposit-Type Contracts

Guaranteed Interest Contracts and Funding
Agreements

Answer 8

• are contracts that provide the contractholder will place one or more deposits with the insurer in exchange for repayment of such deposits, along with interest thereon, at a guaranteed rate.

Question 9

Liabilities for Premium Amounts

Premiums Received in Advance
Several Years’ Premiums at one time

Answer 9

insurer discounts the value of such premiums and accept a lesser amount in cash.

Question 10

Premiums Received in Advance

Accounting for Transactions

Answer 10

advance premiums are identified separately for life and for accident and health business.

credited to one or more premium income accounts. It is therefore necessary to debit premium income as part of an accrual entry with the offsetting credit to the premiums paid in advance liability.

Question 11

Premium Deposit Funds

Answer 11

• credit a premium deposit fund for the amount of money received
• credit annual interest on the amount in this
fund.

Using this method, individual premiums are paid from the premium deposit fund when due, and the premium income account is credited at that time.

Question 12

Premium Deposit Funds

Accounting for Transactions

Answer 12

the premium deposit fund does not represent discounted premiums. Rather interest is credited on amounts in the fund annually at agreed upon rates. The crediting of such interest is reflected in the financial statement as interest expense.

no premium income is reflected in the financial statement for amounts that are not yet due.

Question 13

Terminal Dividends

Answer 13

• In addition to the payment of annual dividends, many companies pay special dividends when policies terminate after having been in force for a specific number of years, such as 10, 15, 20, or more. These dividends are referred to as terminal dividends and a liability is established as well for the amount of such dividends that will be paid in the following calendar year.

Question 14

Policyholders’ Dividend Accumulations

Dividends are left to accumulate at interest

Answer 14

• The dividend left at interest may later be received by or credited to the policyholder in any of several ways:
• As a cash withdrawal.
• As premium applied to the purchase by the policyholder of paid-up insurance.
• As premium to pay up or mature the policy.

Question 15

Policyholder Coupons

Answer 15

• Unlike dividends, which are not guaranteed, coupons are provided for in the policy when it is issued and are guaranteed for specific amounts.
• Coupon Polices are no longer issued by companies.

Question 16

Provision for Experience Rating Refunds

Answer 16

Deposit accounting treatment is given to contracts that carry no mortality or morbidity risk to the insurer. Reporting of the detail associated with such contracts appears in Exhibit 7, Deposit-Type Contracts.

• Losses may or may not be charged back. If charged
  back, losses for each group are usually accumulated for a certain number of years.

Question 17

Liabilities for Deposit-Type Contracts

Annuities Certain

Answer 17

• The essential difference between the two types of contracts is that annuities certain arise from funds deposited with the insurer for the purpose of receiving periodic payments while supplementary contracts, as was noted, arise from the termination of one type of benefit contract, usually a life insurance policy, and the transfer of proceeds to the supplementary contract account.
• “Contracts issued by a reporting entity that do not incorporate mortality or morbidity risk shall not be accounted for as insurance contracts.” “Amounts received as payments for such contracts shall not be reported as revenues but shall be recorded directly to an appropriate policy reserve account.”

Question 18

Liabilities for Premium Amounts

Premiums Received in Advance

Answer 18

• Insurers will typically record the premiums received as income at the time of receipt.

It is “unearned” as of the statement date and should not be reflected in earned premiums.
•For life contracts, advance premiums are those premiums received, which are due on or after the next policy anniversary date. Use mean reserve that assume the annual premium has been paid.

•For accident and health contracts, advance premiums are those premiums received, which are due on or after the next premium due date. Use Mid-terminal Reserve that assume premiums are paid to the valuation date.

• A liability for premiums paid in advance can also arise when insurers allow policyholders to pay several years’ premiums at one time. Since the insurer has the use of policyholder funds that are not yet due, it is customary for the insurer to discount the value of such premiums and accept a lesser amount in cash. For