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Authorities on a whole life insurance and cash surrender value

A whole life insurance is a contract with guaranteed money back when policy holder passes away if premium payment is uninterrupted. A whole life insurance contains a saving component called total cash surrender value. After year three, the policy starts generating some of the cash value, meaning the premium paid can cover the insurance companies cost for the death benefit, administrative costs and profit and have money left over (Grimes, D, 2009). The definition of life insurance cash surrender value is as follow.

The amount of cash that may be realized by the owner of a life insurance contract or annuity contract upon discontinuance and surrender of the contract before its maturity. The cash surrender value may be different from the policy account balance due to outstanding loans (including accrued interest) and surrender charges. (FASB, 2021c).

It also states that cash surrender value could be less than the accumulation of premium paid depends on the age of the policy. ASC 815-15-55-73 section explains that cash surrender value is linked to S&P 500 index (FASB, 2021d).

As dictated by the Pension Protection Act of 2006, insured employee is required to be notified that company is the beneficially at the time of the employees death and provide written consent (Federal Deposit Insurance Corporation, 2008).

Recommendation per Authoritative Sources

1. Deferred compensation on $1.5M bonus is fully vested since Janet is not required to be working for the next 10 years to receive the bonus. Therefore, accounting treatment should be the same way as compensated absences (FASB, 2021b). Riley Company should record her agreement at full value of $1.5 million as a deferred compensation liability on the balance sheet and a deferred compensation expense on the income statement (FASB, 2021a).
2. Life insurance premium will be recorded as expense. Life insurance cash surrender value will increase over the years and record them as asset (Grimes, D, 2009). When life insurance proceeds are received by Rileys company, the difference between cash received and cash surrender value will be gain on life insurance policy.
3. The investment in life insurance for Janet Anderson, with Riley Company as beneficiary, requires that Janet be notified in writing of the policy and provide written consent. The documentation should be stored for tax and legal purpose (Federal Deposit Insurance Corporation, 2008).

Conclusion

1. Deferred compensation expense of $1.5M will impact income statement right away when contract is signed with Janet. Annual cash outflow of $150,000 will reduce deferred compensation liability until balance will be $0 when final payment is made to Janet or her estate.
2. Life insurance cash surrender value will be calculated based on S&P 500 index. At the end of each year, cash surrender value should be evaluated and adjust the asset balance accordingly.
3. Riley company cannot offset life insurance cash surrender value against deferred compensation liability. Only time deferred compensation liability can offset with asset is when company put away fund specifically for paying Janets bonus. A whole life insurance policy was purchased to cover the cost to find replacement of Janet in case she passes away, not to pay her bonus.