Endowment Insurance Definition In Accounting

Endowment Insurance Definition In Accounting: Everything You Need to Know

Endowment insurance is a type of life insurance policy that combines life insurance coverage with an investment component. Simply put, it is a policy that provides both insurance coverage and a savings plan. The policyholder pays regular premiums, and the policy pays out a lump sum after a certain period of time, typically 10, 15, or 20 years. This type of insurance policy is popular among individuals who want to ensure that they have a financial safety net for their loved ones in the event of their untimely death, while also investing for their future.

In accounting, endowment insurance is treated as a long-term investment. This means that the premiums paid by the policyholder are treated as investments, and the policy’s cash surrender value is considered an asset in the insurer’s books. The insurance company calculates the policy’s cash surrender value based on several factors, including the premiums paid, the policy’s duration, and the insurer’s investment earnings.

Types of Endowment Insurance Policies

There are two main types of endowment insurance policies: traditional and unit-linked. Traditional endowment policies offer a guaranteed payout at the end of the policy term, while unit-linked policies offer a variable payout based on the performance of the underlying investments. Let’s take a closer look at each of these policies.

Traditional Endowment Policies

Traditional endowment policies are also known as with-profit policies. These policies offer a guaranteed payout, which consists of the sum assured and any bonuses that have been added to the policy. The sum assured is the minimum amount that the policy will pay out at the end of the policy term, while bonuses are additional payouts that are added to the policy depending on the insurer’s performance.

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The premiums paid by the policyholder go towards paying for the life insurance coverage, as well as the investment component of the policy. The investment component is managed by the insurer, and the policyholder does not have any control over how the funds are invested. The insurer invests the funds in a mixture of stocks, bonds, and other assets, with the aim of generating a return that is higher than the sum assured.

If the insurer performs well, the policyholder will receive a higher payout than the sum assured. However, if the insurer underperforms, the policyholder may receive a lower payout than the sum assured. It is important to note that the bonuses added to the policy are not guaranteed, and may vary depending on the insurer’s performance.

Unit-Linked Endowment Policies

Unit-linked endowment policies differ from traditional policies in that the policyholder has more control over how the funds are invested. With a unit-linked policy, the policyholder can choose to invest their premiums in a range of funds offered by the insurer. Each fund has a different investment objective and risk profile, allowing the policyholder to choose a fund that suits their risk appetite and investment goals.

The payout from a unit-linked policy is variable, and depends on the performance of the underlying investments. If the investments perform well, the policyholder will receive a higher payout than if they had invested in a traditional policy. However, if the investments underperform, the policyholder may receive a lower payout than if they had invested in a traditional policy.

Accounting Treatment of Endowment Insurance

In accounting, endowment insurance is treated as a long-term investment. This means that the premiums paid by the policyholder are treated as investments, and the policy’s cash surrender value is considered an asset in the insurer’s books. The insurer calculates the policy’s cash surrender value based on several factors, including the premiums paid, the policy’s duration, and the insurer’s investment earnings.

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The insurer recognises the premiums received as income in the year in which they are received, and the expenses incurred in underwriting the policy as expenses in the same year. The insurer also recognises the investment earnings on the policy as income in the year in which they are earned.

The policy’s cash surrender value is calculated by discounting the expected future benefits and deducting the expected future premiums. The insurer then adds the policy’s investment earnings to this to arrive at the policy’s cash surrender value. The cash surrender value is considered an asset, and is shown on the insurer’s balance sheet.

Conclusion

Endowment insurance is a type of life insurance policy that combines insurance coverage with a savings plan. In accounting, endowment insurance is treated as a long-term investment, and the policy’s cash surrender value is considered an asset. Traditional endowment policies offer a guaranteed payout, while unit-linked policies offer a variable payout based on the performance of the underlying investments. Regardless of the type of policy, endowment insurance is a popular choice among individuals who want to ensure that they have a financial safety net for their loved ones in the event of their untimely death, while also investing for their future.