Key Person Insurance Premium Journal Entries, Explained Plainly

A key person insurance premium is usually split in two. One part pays for the death protection and expenses. The other part builds the policy’s cash surrender value. Only the protection part is typically recorded as an expense. This guide shows how to make the split and record it, using the insurer’s annual statement as the source.

What a key person policy means for your books

A key person policy is a company asset when the business owns the policy, pays the premium, and is the beneficiary. Key person life insurance pays a business for financial losses caused by the death or disability of a key employee, according to the Insurance Information Institute. Because the company holds the policy, the premium is a business entry, not a personal expense of an owner.

Ownership and beneficiary decide the accounting. If an employee or a family member owns the policy, the entries change. The examples below assume the company is both owner and beneficiary. Other structures should be reviewed before anything is posted.

Florida law adds a consent step. Under Fla. Stat. § 627.404, a business can insure a key person only if that person gives written consent before the insurance is bought. The business may not retaliate against a key person who says no. Keep the signed consent in the policy file. For the coverage basics, read our key person insurance guide.

Splitting each premium into expense and cash value

Split each premium using the insurer’s annual statement, not an estimate. A permanent policy premium covers three things: the cost of death protection, the insurer’s expense charges, and the amount credited to cash value. The annual statement shows how the year’s premiums were applied. Use those figures for the split.

Here are the terms in plain words. The cost of insurance is the charge for the death protection. Expense charges cover the insurer’s cost of running the policy. The cash value portion stays in the policy. Match your balance sheet figure to that definition and to the statement.

Show guaranteed and non-guaranteed values on separate lines. Guaranteed amounts are the ones the contract promises. Non-guaranteed amounts depend on the insurer’s actual results. Dividends, where a policy pays them, are not guaranteed. Do not add projected growth from an illustration to the books.

The key person insurance premium journal entry

Debit cash surrender value for the policy’s cash value component. Debit life insurance expense for the protection portion.

Only the protection and expense portion usually goes to expense. The rest is an asset. Your accounting framework and the insurer’s statement decide the final entry, so confirm both before posting. The split varies with policy design, so the amounts depend on the facts of your policy.

Its premium is usually booked to an employee benefits line. Key person premiums do not belong there. Use the split described above.

Recording cash value growth and annual statements

Record the year-end change in cash surrender value from the insurer’s statement. Reconcile it to the balance sheet each period. Compare the new cash value with the prior year’s ledger balance, post the difference as the year’s increase, and confirm the totals match.

Illustrations show what cash value could look like at future dates. Those projections are not a return the company is promised. Record the actual figures on the statement, not the projected ones.

Use this annual checklist:

• Confirm the owner and beneficiary names match the policy.
• Match the statement’s cash value and premium totals to the ledger.
• Confirm the key person’s signed consent is in the file.
• File the statement with the policy records.

If ownership of the policy ever moves to the employee, the entries change. See our guide on transferring a key person policy to an employee.

Is key person insurance tax-deductible?

Generally, no. Federal law starts from a general rule under 26 U.S.C. § 264 that no deduction is allowed for certain amounts tied to life insurance contracts. Key person premiums are generally not deductible when the business is directly or indirectly a beneficiary under the policy. Contact our team to confirm the treatment for your own company.

A book entry can differ from the tax return. The return follows tax rules, not your ledger. Contact our team to reconcile the two. Ask them, too, whether an employer-owned life insurance return applies. Section 101(j) limits the income exclusion on an employer-owned life insurance contract to the premiums and other amounts paid for the contract, unless the notice and consent requirements are met and an exception applies. The separate duty to file a return and keep records is a different rule, under 26 U.S.C. § 6039I, and is not stated in section 101. This filing has specific requirements to keep in mind.

For how term choices affect the books and the cash value line, see our key person term length guide.

Recording a death benefit, surrender, or loan

When a death benefit is paid, remove the policy’s cash surrender value from the balance sheet. For an employer-owned policy, the death benefit is excluded from income only up to the premiums and other amounts paid for the contract, so record any excess as income or gain in the period received, unless the notice and consent requirements are met and an exception applies. Under 26 U.S.C. § 101, amounts paid by reason of the insured’s death are generally not gross income for federal income tax purposes. The IRS explains the general rule on its life insurance proceeds page. Interest paid on proceeds left with the insurer is taxable, so track it separately.

Tax treatment still depends on the policy and the company’s tax position. Contact our team to review the entry before posting.

A surrender or policy loan changes both the asset and liability lines. Florida’s policy loan rule, in Fla. Stat. § 627.458, applies only after the policy has a cash surrender value and while no premium is in default. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” It does not apply to term policies or to term insurance benefits provided by riders or supplemental policy provisions. The insurer may defer granting a loan, other than for the payment of any premium to the insurer, for six months after the application.

Talk with our team about your key person policy

If you inherited a key person policy after a partner left, or a bookkeeper has asked how to post premiums nobody has split, you do not have to sort it out alone. Our team offers a coverage review of the policy and its books. A coverage review is a paid engagement, and fees are disclosed in writing before any work begins.

To ask about a coverage review, contact our office and we will go over the policy, the statement, and the ledger with you.

Frequently Asked Questions