Accounting Treatment of Life Insurance Policy at the Time of Death of a Partner: If a joint life insurance policy is taken on lives of all partners, then sum insured is payable on death of any one partner when separate life insurance policy are taken on lives of partners, then sum insured is payable only on the policy of that partner. However, to find out the sum payable to the legal heir of the deceased partner, the surrender value of other partners policies is also kept in mind. Principally, there is no difference in the accounting procedure whether policies taken are several or joint. It is noteworthy that firm is responsible for payment of premium to insurance company ,if the policy/policies are taken by the firm.

1. Individual or Separate Life Policy
(i) For Payment of Premium
Insurance Premium A/c Dr.
To Cash/Bank A/c
(Being insurance premium paid)

(ii) For Premium Transferred to P&L A/C Every Year
Profit and Loss A/c Dr.
To Insurance Premium A/c
(Being premium transferred to P&L account)

(iii) For Amount of Policy Due on Death of Partner
Insurance Company A/c Dr.
To Life Policy of Deceased Partner’s A/c
(Being policy amount due)

(iv) For Amount of Policy Received
Bank A/ c Dr.
To Life Policy of Deceased Partner’s A/c
(Being policy amount received)

(v) On Distribution of Deceased Partner and Policy Money of Surrender Value of Surviving Partners Among All Partners.
Life Policy of Deceased Partner A/c Dr.
Life Policies of Other Partners A/c Dr.
To All Partners’ Capital A/c
(Being total amount of policy distributed in all the partners)

Alternative Method: When insurance policy account is not to be shown in books, then with the total amount of policy, amount of deceased partner and the surrender value of surviving partners are added and the share of deceased partner is ascertained and with this amount, deceased partner’s capital account is credited and surviving partners’ capital account are debited in gaining ratio.

Remaining Partners’ Capital/Current A/c Dr.
To Deceased Partner’s Capital/Current A/c
(Being deceased partner share in policy amount credited to his capital account)

2. Joint Life Insurance Policy on the Lives of Partners : In case of joint life insurance policy accounting can be done as per any one of three different methods.
(i) Treating Premium as Trade Expenses: In this situation the following entries will be passed
Journal Entries
(a) For Payment of Premium
Insurance Premium A/c Dr.
To Cash/Bank A/c
(Insurance Premium Paid)

(b) For Premium Transferred to P&L Account
Profit and Loss A/ c Dr.
To Insurance Premium A/c
(Premium Transferred to P&L account)

(c) For Amount of Policy Due on Death of Partners
Insurance Company A/c Dr.
To Joint Life Policy A/c
(Policy amount due)

(d) For Amount Received of Policy
Bank A/c Dr.
To Insurance Company A/c
(Policy Amount Received)

(e) For Distribution of Amount of Policy.
Joint Life Policy A/c Dr.
To All Partners’ Capital A/c
(Policy amount distributed)

(ii) When Premium is Treated as an Investment: In this case the total amount of premium paid is not transferred to profit and loss account but only the excess of premium paid over surrender value at the end of the year is transferred to profit and loss account. By following this method the balance in life insurance policy account always remains equal to the surrender value which is shown on the assets side of the balance sheet. 

Following entries are passed for accounting under this method:
(a) On Payment of Premium
Joint Life Policy A/c Dr.
To Bank A/c
(Being insurance premium paid)

(b) On Write Off the Amount
Profit and Loss A/c Dr.
To Joint Life Policy A/c
(Being premium transferred to P & L account)

(c) On Receiving the Amount of Policy
Insurance Company A/c Dr.
To Joint Life Policy A/c
(Policy amount due)

(d) On Receipt of sum insured
Bank A/c Dr.
To Insurance Company A/c
(Being policy amount received)

(e) On Distribution of Amount of Policy
Joint Life Policy A/c Dr.
To All Partners’ Capital A/c
(Being policy amount distributed)

(iii) When Premium is Treated as an Investment and Reserve is Correct: Sometimes, a few firms treat premium payment as an investment and simultaneously create a reserve every year. The amount calculated on the basis of surrender value i.e., excess of premium paid over surrender value is transferred to reserve account instead of profit and loss account. 

Following entries are passed under this method:
(a) To Paid Premium Every Year
Joint Life Policy A/c Dr.
To Bank A/c
(Being insurance premium paid)

(b) To Make Joint Life Insurance Policy Reserve Every Year
Profit and Loss Appropriation A/c Dr.
To Joint Life Policy Reserve A/c
(Being joint Life policy reserve created)

(c) To Difference in Balance of Reserve Account and Insurance Account
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c
(Being difference charged to reserve account)

(d) To due Insurance Amount
Insurance Company A/c Dr.
To Joint Life Policy A/c
(Being policy amount received)

(e) To Received Insurance Amount
Bank A/c Dr.
To Insurance Company A/c
(Policy amount received)

(f) To Close Joint Life Insurance Policy Reserve Account
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A / c
(Being balance of reserve account transferred to JLP account)

(g) To Divide Insurance Policy Amount in All Partners
Joint Life Policy A/c Dr.
To Partner’s Capital A/c
(Being policy amount distributed)