Premium Accounting in Life Insurance
When a premium counts as income, and when it is still only cash in hand.
A life insurer receives premium all year, but the accounts care about one question: in which year does that premium become income? IRDA's financial statements regulations (2000) answer it in one line in Schedule A Part I para 2: "Premium shall be recognised as income when due". The same paragraph adds that for linked business, the due date may be taken as the date the associated units are created.
So premium income is an accrual figure, not a cash figure. A premium that has fallen due is income even if the cheque is still in the post, and cash that arrives before anything is due is not yet income at all. The rest of this chapter is about applying that rule to different kinds of premium, and the policies of HDFC Life, LIC and SBI Life show how real insurers write it into their accounts.
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Key Terms
- Regular premium
- HDFC Life and LIC both treat premium under regular-premium-paying plans with a limited or predetermined policy term as regular premium.
- Single premium
- At HDFC Life, premium on products other than those regular premium plans is single premium, and so is top-up premium.
- Linked policy income
- The charges an insurer takes from unit-linked funds: fund management, policy administration and mortality charges, plus other charges where applicable (HDFC Life's list; LIC and SBI Life name the same three).
- Premium ceded
- Premium the insurer passes on to its reinsurers. HDFC Life accounts for it on a due basis under the terms of the reinsurance treaties; LIC and SBI Life account for it per the treaty or in-principle arrangement with the reinsurer.
- Acquisition costs
- Costs that vary with, and are primarily related to, acquiring new and renewal insurance contracts. The test is an obligatory relationship between the cost and execution of the contract, meaning commencement of risk (Schedule A Part I para 4).
- Premium deficiency
- Recognised if expected claim costs, related expenses and maintenance costs together exceed the related unearned premiums (Schedule A Part I para 3).
Linked Policy Charges: Recovered or Due?
This is where the insurers' wording differs, and where questions look for the trap.
- check_circleHDFC Life's FY2026 policy recognises linked policy income when it is recovered from the linked funds under the policy terms.
- check_circleHDFC Life's FY2018 policy recognised the same income when due, so the wording changed between editions.
- check_circleSBI Life recognises fund management, policy administration and mortality charges when recovered from the linked fund.
- check_circleLIC recognises income from linked funds when due.
- check_circleNone of the three recognises these charges upfront at the point of sale.
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Reinsurance, Acquisition Costs and Interest
- check_circleProfit commission on reinsurance ceded: HDFC Life nets it against premium ceded rather than showing it as separate income.
- check_circleAcquisition costs are expensed in the period in which they are incurred (Schedule A Part I para 4). They are not deferred and spread over the policy term. HDFC Life and LIC both say so in their policies.
- check_circleHDFC Life's acquisition costs include commission to intermediaries, rewards and incentives, sales staff costs, office rent, medical examination costs, policy printing and stamp duty.
- check_circleInterest charged on policy reinstatement: HDFC Life accounts for it on a received basis and shows it under "Others" in "Other Income" in the Revenue Account.
- check_circleInterest on policy loans: accrual basis at both HDFC Life and LIC.
Where the Rule Comes From
The financial statements regulations were notified on 14 August 2000 under section 114A of the Insurance Act, 1938. Regulation 3(1) makes a life insurer follow Schedule A. Schedule A names the Revenue Account as the Policyholders' Account, the Profit and Loss Account as the Shareholders' Account, and the Receipts and Payments Account as the cash flow statement, which must be prepared only under the Direct Method.
Insurers' own policies cite different instruments depending on the year. HDFC Life's FY2018 policy and LIC's FY2022 policy cite the 2002 financial statements regulations and the master circular of 11 December 2013. Their FY2026 and FY2025 policies cite the IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations, 2024 and the master circular dated 17 May 2024. The "when due" rule appears in all of them.
Exam Traps
Non-linked premium is income when due, not when the cash arrives and not when the policy is issued. Linked premium follows unit creation, not the due date or payment date. Premium on a lapsed policy waits for reinstatement. Top-up premium is single premium, not regular. Acquisition costs are expensed as incurred, never amortised. Outstanding premium is an asset; premium received in advance and unallocated premium are liabilities.
FAQs
When is premium recognised as income by a life insurer?expand_more
When it is due. IRDA's financial statements regulations say "Premium shall be recognised as income when due". For linked business the due date may be taken as the date the units are created.
Is premium on a lapsed policy counted as income?expand_more
Not until the policy is reinstated. HDFC Life, LIC and SBI Life all say so in their accounting policies.
Is a ULIP top-up premium regular or single premium?expand_more
Single premium. Both HDFC Life and SBI Life treat top-up premium as single premium.
Are acquisition costs such as commission spread over the policy term?expand_more
No. The regulations say acquisition costs are expensed in the period in which they are incurred.
How is premium received in advance shown?expand_more
As a liability. IRDAI's master circular lists premium received in advance, and unallocated premium, among other liabilities, while outstanding premium is among other assets.
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