Page 163 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes self assessment

Fill in the blanks:
1. Some margin must be added to cover the life ................ company’s future expense levels to
be experienced in administering the policy.
2. A ................ health policy provides for income to be paid in the event of the insured falling
ill.
3. A ................ is a sum paid to the life office to assure the benefit specified by the policy.
4. Pension policies involve paying ................ or single premiums to create a stream of income
(starting at retirement), usually also with the option of paying a capital sum.
5. The return arising from a ................ policy is determined by reference to the value of a
particular fund of investments.

8.2 accounting for insurance

There are following concepts which are used to describe the accounting for insurance:

8.2.1 premiums

There are two types of premium:
Regular Premiums: The accounting entries to recognise a ` 50 renewal premium on a regular
premium policy in the month in which the premium falls due would be:
Policyholder/Intermediary Debtor (Balance sheet) Dr 50

Premiums Written (Technical Account) 50
When the premium is actually received the following entries will be made:
Cash Dr 50
Policyholder/Intermediary Debtor 50
If a debit balance remains on the policyholder/intermediary debtor account this will indicate
that a premium has not be received and either the policy may have lapsed or the intermediary
has not yet settled the account.

Single Premiums and Initial Premiums: Under these cases the cash is usually required when the
policy proposal is made and the accounting entry would be:
Cash Dr 50

Premiums Written 50
8.2.2 claims

The amount of claim that is paid to the policyholder depends on the type of policy written, and
in particular whether it is without or with profit. It is paid either on death or on the maturity of
an endowment type policy.

Without-profit Policies: The only benefit derived by the policyholder (or his/her estate) is
payment of the sum assured. This amount is determined by the original terms of the policy.
With-profit Policies: This term is used to describe policies where the policyholders are eligible to
participate in the surpluses established. Thus the claim amount is dependent on:

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