How to Account for Life Insurance Premiums

Business owners sometimes offer life insurance policies to employees as part of the insurance benefits provided through the company. The cost of the life insurance is usually significantly lower than the price an employee could obtain individually, so employees are often happy to take advantage of this benefit. Some companies pay for all or part of the life insurance premiums and usually include the employee's share of the cost as a deduction to employee payroll. Accounting for life insurance premiums includes the journal entries for the payroll deductions as well as the journal entries for payment of the premium.

Instructions

Recording Payroll Deductions

1. Reduce the amount deducted from your checking account for payroll checks by the amount of the life insurance deductions recorded for employees. Essentially, you reduce the amount on the payroll check cut to an employee by the amount of the life insurance premium withheld from pay. That decreases the amount of checking account funds used to cover the payroll check when it clears your bank.

2. Record an increase to the Life Insurance Payable account if you use the accrual accounting method. Because the funds will be used to pay the life insurance premium bill, the funds are considered a "payable" or future liability for accrual accounting purposes.

3. Record a decrease to the Life Insurance expense account if you use the cash accounting method. Because the cash accounting method only deals with cash in and out and does not record future payables or receivables, you record all journal entries for the life insurance payroll deductions and premium payments directly to the Life Insurance expense account.

Paying the Premium

1. Reduce the checking account by the entire amount of the life insurance premium payable.

2. Reduce the amount recorded to the Life Insurance Payable account to zero if you use the accrual accounting method.

3. Increase the Life Insurance expense account by the total amount of the life insurance premium less any amounts recorded to the Life Insurance payable account. If you use cash basis accounting, record the entire life insurance premium amount as an increase to the Life Insurance expense account. Regardless of accounting method, the net expense to the company is the net of what the business paid for the policy less the employee's contribution.

Tips & Warnings

• If you are not sure how to properly record life insurance premiums on your accounting general ledger, consult with an accountant to assist you.

References

• "Principles of Accounting"; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991