Recording Key Person Life Insurance on Your Balance Sheet

Most companies that own key person life insurance record the policy at its cash surrender value, the figure the insurer reports. A term policy usually has little or no cash value to show. Learning how to record key person life insurance on balance sheet entries starts with three facts: who owns the policy, who is the beneficiary, and what type of policy it is. Those facts come from the policy itself, not from memory or a sales illustration. This guide walks through each step for Florida business owners, controllers, and bookkeepers. It covers the accounting and tax points. Insurance placement is handled separately, as explained near the end.

Why the Ownership of the Policy Decides How It Is Recorded

Ownership and beneficiary decide how a key person policy is recorded. Usually the company owns the policy, pays the premiums, and is named as beneficiary. The goal is to offset financial loss if a key officer or owner dies or becomes disabled. The Insurance Information Institute describes key person coverage as compensation for losses caused by an employee’s death or disability.

When the company owns the policy, the policy usually belongs on its books. When an owner or employee owns it personally, the company may not record it at all. The books follow the contract, not the label people use. Ownership can also change over time, so check the file for transfers.

Before you make any entry, pull the ownership and beneficiary pages of the policy. The insurer’s contract controls the facts. Compare the owner, insured, and beneficiary against your company records. For more on how the coverage is structured, see our key person insurance coverage page. Your CPA should review the policy form and the ledger together.

Recording Premiums Paid: Asset Build-Up Versus Expense

Term premiums usually do not build a balance sheet asset, because most term policies have no cash value. Whole life is different. A permanent policy builds cash value, so part of each premium may add to the balance sheet figure.

Premiums on a permanent policy usually pay for two things. One part pays the cost of insurance. The other part builds cash value. Your company’s accountant decides how to split and record each premium under the accounting rules that apply to its statements. The split depends on the policy’s design, so the contract and the insurer’s statement matter.

Keep a schedule of every premium. Note the date, the amount, and the portion your accountant assigns to cash value. This schedule makes the annual reconciliation easier. It also helps if a question comes up years later.

A sales illustration shows projections, not promises. Treat it as a planning tool, not as a book entry.

Cash Surrender Value and Net Cash Surrender Value on the Balance Sheet

The cash surrender value, as the insurer reports it, is usually the starting point for the balance sheet figure. Your CPA makes the final presentation.

Net surrender value is different. Many people use “net cash surrender value” loosely. The two figures answer different questions, so the label matters. Confirm which figure your accountant is using before you post an entry.

Keep guaranteed values separate from values that depend on dividends or the insurer’s projections. Guaranteed values come from the contract. Other values are not guaranteed. Mark each one on its own ledger line. Then reconcile the balance sheet figure to the insurer’s annual statement and note any difference for follow-up.

Policy Loans and Dividends: How They Show Up

A policy loan reduces the net value of the policy. It is recorded as a debt owed to the insurer, and the loan amount should appear on its own line. Borrowing against a policy changes both the asset side and the liability side of the books. Document the reason, amount, and terms of every loan in writing.

Interest on policy loans may fall under the key person rules in 26 U.S.C. § 264. That section includes a $50,000 key person exception. IRC § 264 reads: “Subsection (a)(4) shall not apply to any interest paid or accrued on any indebtedness with respect to policies or contracts covering an individual who is a key person to the extent that the aggregate amount of such indebtedness with respect to policies and contracts covering such individual does not exceed $50,000.” Whether it applies depends on the facts.

Dividends on participating whole life policies are not guaranteed. Record them as the insurer reports them, and keep them apart from guaranteed values. Dividends that are reinvested or applied to the policy can raise the cash value. Track those components separately so each one can be traced. The Florida Department of Financial Services life insurance guide explains cash value, policy loans, and beneficiaries in plain terms.

Why Premiums Are Generally Not Deductible

Premiums are generally not deductible when the business is the beneficiary. Under 26 U.S.C. § 264, premiums on a life policy are not deductible when the taxpayer is directly or indirectly a beneficiary under the policy. Key person premiums that a business pays for its own benefit usually fall under this rule.

This is why key person premiums usually do not show up as a business expense on the tax return. Tax treatment and book treatment can differ. A premium that is not deductible for tax may still be recorded in the company’s financial statements under its accounting method. Track that difference for tax purposes.

Ask your tax preparer to confirm the treatment before filing. Small errors here can carry into several years of returns.

Recording the Death Benefit and Surrender of the Policy

When the insured dies, the insurer pays the death benefit to the company. The company removes the policy’s recorded value from its books and records the proceeds it received. Any difference is recorded as income or gain under the company’s accounting method. Your accountant handles that entry.

For tax purposes, 26 U.S.C. § 101 generally excludes amounts paid by reason of the insured’s death from gross income. The exclusion has limits. Review any transfer of a policy before it happens.

Surrender during the insured’s life works differently. Surrender amounts are governed by other provisions, such as section 72(e) of the Internal Revenue Code, which is set out at 26 U.S.C. § 72. Keep the surrender statement in the company file.

What to Gather for Your CPA Each Year

Gather these records each year: the policy contract, the ownership and beneficiary pages, the insurer’s latest annual statement, the premium payment history, any loan and dividend records, and the illustration used at purchase, if one exists.

Reconcile the cash surrender value to the ledger once a year. Note any difference and follow up before closing the books.

Some employer-owned policies create a filing duty. Under 26 U.S.C. § 6039I, an applicable policyholder owning employer-owned life insurance contracts issued after the statute’s enactment must file a return each year. Under IRC § 6039I, an applicable policyholder owning one or more employer-owned life insurance contracts issued after the date of the enactment of this section must file a return for each year such contracts are owned, showing the number of employees at year end, the number of those employees insured under such contracts, the total amount of insurance in force at year end, the policyholder’s name, address, taxpayer identification number and type of business, and that the policyholder has a valid consent for each insured employee (or the number of insured employees for whom consent was not obtained). Keep records that support it.

Key employee changes matter too. A departure, retirement, or death can change how the policy is used and recorded. Update the file when the status changes. The NAIC Life Insurance Buyer’s Guide explains term and permanent coverage in plain words.

Insurance is offered through Nischay Rawal, a licensed insurance agent, separately from the accounting practice. The carrier is named on the policy itself.

Talk Through Your Company’s Policy With Us

If your company is dealing with a key employee’s death, departure, or retirement, the policy may be one of many open items. You may also be trying to make sense of a policy someone else set up years ago. That is a common position to be in, and the records can be sorted out one step at a time.

If the policy on your books doesn’t match the insurer’s statement, you can ask us for a coverage review of the policy and your records. Contact our team to start that conversation.