Journal Entries in an Insurance Company's Books
Every premium, claim and commission entry an insurer passes, and the rule that decides when.
An insurance company keeps its books by ordinary double entry: every debit has an equal credit. What makes its journal different is timing. Premium is income when it falls due, not when cash arrives. A death claim is a cost when it is intimated, not when it is paid. Commission is an expense when incurred, never spread over the policy term.
The tables below give the entry for each common event in a life insurer's books, with the rule that decides when it is passed. Account names vary from insurer to insurer; the line each entry ends up on is the one named in IRDA's prescribed forms (Form A-RA for the Revenue Account, Form A-BS for the Balance Sheet). This page is about the insurer's books. The policyholder's own entry for paying a premium is a different question, covered in the FAQs.
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The Golden Rules Behind Every Entry
The traditional approach splits accounts into three kinds. Each entry below applies one of these rules on each side.
Real
What it covers
Assets such as cash, bank, investments
Debit
What comes in
Credit
What goes out
Personal
What it covers
Persons and organisations: agents, reinsurers, policyholders owed money
Debit
The receiver
Credit
The giver
Nominal
What it covers
Income, expenses, losses and gains: premium, commission, claims
Debit
All expenses and losses
Credit
All incomes and gains
| Account type | What it covers | Debit | Credit |
|---|---|---|---|
| Real | Assets such as cash, bank, investments | What comes in | What goes out |
| Personal | Persons and organisations: agents, reinsurers, policyholders owed money | The receiver | The giver |
| Nominal | Income, expenses, losses and gains: premium, commission, claims | All expenses and losses | All incomes and gains |
Reinsurance and Commission Entries
Reinsurance premium ceded falls due
Debit
Reinsurance premium ceded
Credit
Due to reinsurer
Why
Accounted on a due basis under the treaty. It is deducted from premium to reach net premium in Schedule 1
Commission earned by an agent
Debit
Commission (Schedule 2)
Credit
Agent, or Bank when paid
Why
Acquisition costs are expensed in the period incurred (Schedule A Part I para 4)
Medical examination fee, policy stamp duty
Debit
Operating expenses (Schedule 3)
Credit
Bank
Why
HDFC Life lists both as acquisition costs; expensed as incurred, not deferred
| Event | Debit | Credit | Why |
|---|---|---|---|
| Reinsurance premium ceded falls due | Reinsurance premium ceded | Due to reinsurer | Accounted on a due basis under the treaty. It is deducted from premium to reach net premium in Schedule 1 |
| Commission earned by an agent | Commission (Schedule 2) | Agent, or Bank when paid | Acquisition costs are expensed in the period incurred (Schedule A Part I para 4) |
| Medical examination fee, policy stamp duty | Operating expenses (Schedule 3) | Bank | HDFC Life lists both as acquisition costs; expensed as incurred, not deferred |
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Claims and Benefits Entries
Each claim type has its own trigger. The triggers below are from HDFC Life's and SBI Life's published accounting policies, which differ in places.
Death claim intimated
Debit
Claims by death (Benefits paid, Schedule 4)
Credit
Claims outstanding
When it is passed
On receipt of intimation (HDFC Life, SBI Life)
Death claim paid
Debit
Claims outstanding
Credit
Bank
When it is passed
On payment; the cost was already booked
Reinsurer's share of that claim
Debit
Due from reinsurer
Credit
Claims by death
When it is passed
Same period as the claim is intimated; the recovery is netted off the claim
Maturity claim
Debit
Claims by maturity
Credit
Claims outstanding
When it is passed
When due (HDFC Life, non-linked) or on the maturity date (SBI Life)
Annuity instalment
Debit
Annuities paid
Credit
Annuities payable, or Bank
When it is passed
When due
Non-linked surrender
Debit
Surrenders
Credit
Claims outstanding, or Bank
When it is passed
On the insured's consent to the quote (HDFC Life) or when intimated (SBI Life)
Claim settlement cost, such as an investigation fee
Debit
Claims (same head as the claim)
Credit
Bank
When it is passed
Claims cost is the policy benefit plus claim settlement costs
| Event | Debit | Credit | When it is passed |
|---|---|---|---|
| Death claim intimated | Claims by death (Benefits paid, Schedule 4) | Claims outstanding | On receipt of intimation (HDFC Life, SBI Life) |
| Death claim paid | Claims outstanding | Bank | On payment; the cost was already booked |
| Reinsurer's share of that claim | Due from reinsurer | Claims by death | Same period as the claim is intimated; the recovery is netted off the claim |
| Maturity claim | Claims by maturity | Claims outstanding | When due (HDFC Life, non-linked) or on the maturity date (SBI Life) |
| Annuity instalment | Annuities paid | Annuities payable, or Bank | When due |
| Non-linked surrender | Surrenders | Claims outstanding, or Bank | On the insured's consent to the quote (HDFC Life) or when intimated (SBI Life) |
| Claim settlement cost, such as an investigation fee | Claims (same head as the claim) | Bank | Claims cost is the policy benefit plus claim settlement costs |
Year-End Entries
Appointed actuary's valuation shows a higher liability for policies in force
Debit
Change in valuation of liability against life policies (Revenue Account)
Credit
Policy Liabilities (Balance Sheet, policyholders' funds)
Why
The appointed actuary determines this liability after the annual investigation (Schedule A Part I para 6)
Surplus in the Revenue Account transferred to shareholders
Debit
Revenue Account (appropriation)
Credit
Profit and Loss Account (Shareholders' Account)
Why
Surplus is appropriated to the Shareholders' Account, other reserves or Funds for Future Appropriations
Shareholders fund a deficit in the policyholders' account
Debit
Profit and Loss Account
Credit
Revenue Account
Why
The top-up runs from shareholders to policyholders, never the reverse
| Event | Debit | Credit | Why |
|---|---|---|---|
| Appointed actuary's valuation shows a higher liability for policies in force | Change in valuation of liability against life policies (Revenue Account) | Policy Liabilities (Balance Sheet, policyholders' funds) | The appointed actuary determines this liability after the annual investigation (Schedule A Part I para 6) |
| Surplus in the Revenue Account transferred to shareholders | Revenue Account (appropriation) | Profit and Loss Account (Shareholders' Account) | Surplus is appropriated to the Shareholders' Account, other reserves or Funds for Future Appropriations |
| Shareholders fund a deficit in the policyholders' account | Profit and Loss Account | Revenue Account | The top-up runs from shareholders to policyholders, never the reverse |
Worked Example: One Policy, One Year
Illustrative figures. A non-linked policy with an annual premium of ₹20,000 due on 15 March. The insurer's year ends on 31 March.
- 1
15 March: premium falls due
Nothing is received yet, but the grace period is running. At year end: Dr Outstanding premium ₹20,000, Cr Premium income ₹20,000. The ₹20,000 counts in this year's premium.
- 2
Commission on that premium
Say the agent's commission is ₹1,000. Dr Commission ₹1,000, Cr Agent ₹1,000. It is this year's expense even though it is paid in April.
- 3
5 April: the policyholder pays
Dr Bank ₹20,000, Cr Outstanding premium ₹20,000. No income is recorded again.
- 4
1 March next year: next premium paid early
Dr Bank ₹20,000, Cr Premium received in advance ₹20,000. It is not due until 15 March, so it is not income on 1 March.
- 5
15 March next year: it falls due
Dr Premium received in advance ₹20,000, Cr Premium income ₹20,000.
Exam Traps
Outstanding premium is an asset; premium received in advance and unallocated premium are liabilities. Premium on a lapsed policy gets no entry until reinstatement. GST is not premium income. Commission is debited to expense when incurred, never to a prepaid or deferred account. A death claim is booked on intimation, so a claim intimated on 30 March but paid in April is this year's cost. Reinsurance recoveries reduce the claim; they are not separate income.
FAQs
What is the journal entry when an insurance company pays a claim?expand_more
Two steps. When the claim is intimated (death) or falls due (maturity): Dr Claims (benefits paid), Cr Claims outstanding. When the money goes out: Dr Claims outstanding, Cr Bank. If part of the claim is reinsured, Dr Due from reinsurer and Cr Claims in the same period.
What is the journal entry for premium received by an insurer?expand_more
Dr Bank, Cr Premium income, if the premium is due. If it arrives before the due date, credit Premium received in advance (a liability) instead, and move it to premium income on the due date.
How is premium due but not received recorded at year end?expand_more
Dr Outstanding premium, Cr Premium income, when the premium is due and the policy is still within its grace period. Outstanding premium is shown under Other Assets.
Is commission paid to agents spread over the policy term?expand_more
No. IRDA's regulations say acquisition costs are expensed in the period in which they are incurred. The entry is Dr Commission, Cr Agent or Bank, in that year.
Is this the same as the prepaid insurance journal entry?expand_more
No. Prepaid insurance is in the policyholder's books: a business that pays next year's premium early records an asset (prepaid insurance) and expenses it over the period covered. In the insurer's books the same payment is a liability, premium received in advance, until it falls due.
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