PREPARATION OF FINAL ACCOUNTS IN LIFE INSURANCE

BUSINESS

INTRODUCTION

The preparation of final accounts must be made in accordance with the provisions of
the Insurance Act, 1938, together with its prescribed forms. The Insurance Act, 1938, is not
only applicable to General Insurance, but also to Life Insurance although the latter is
governed by the LIC Act, 1956. The accounts are prepared for the calendar year, i.e., an
insurance company must prepare its accounts up to 31st December every year.

FORMS

FORMS of final accounts prescribed by the Insurance Act, 1938, are:

(i) FORM A: Form of Balance Sheetboth for Life and General Insurance.

(ii) FORM B: Form of Profit and Loss Accountboth for Life and General Insurance.

(iii) FORM C: Form of Profit and Loss Appropriationboth for Life and General
Insurance.

(iv) FORM D: Form of Revenue Accountfor Life Insurance only.

(v) FORM F: Form of Revenue Accountfor General Insurance only.

(vi) FORM I: Valuation Balance Sheet.

LIFE INSURANCE REVENUE ACCOUNT

This account is to be prepared according to Form D of the First Schedule to the

Insurance Act, 1938. It does not disclose the profit/loss for the year but discloses only the
balance of Life Insurance Fund at the close of the year. This account is prepared by taking the
opening balance of Life Insurance Fund (Cr.) together with all the revenue incomes/receipts
and, at the same time, all revenue expenditures appear in the debit side, the balance is carried
forward as Life Insurance Fund. Form of Revenue Account is presented next:

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EXPLANATION OF THE ABOVE ITEMS

Claims under

The claims that are paid by the Insurance Company are to be separately shown, viz.,
claims by death and claims by maturity. The outstanding claims should also be included
under this head. Claims relating to reinsurance business must be deducted as well. No doubt
it is the most important item of expenditure.

Annuities

This is the total amount of annuities due for payment in the year to the annuitants.
Any reinsurance in this respect must be deducted from total annuities paid. Outstanding
annuities (i.e., due but not yet paid) should also be included.

Surrender

It represents payment made to the policyholders who desire to surrender their policies
and forgo all claims in respect of them. The surrender value received by an insurance
company in respect of reinsured policies should be deducted from the total amount of
surrender values paid during the year.

Bonus in cash

Cash bonus declared by the company is shown under this head. Cash bonus received
in respect of reinsurance, if any, must be deducted. But if any Cash bonus had already been
declared but not paid, the same must also be included.

Balance of Fund and Accounts

It includes Life Insurance Fund, Fire Insurance Business A/c, Marine Insurance and
Misc. Insurance Business A/c. Other Accounts (to be specified) Premiums or Superannuation
Fund A/c, etc.

Debentures Stock

Issue of debentures, if any should be shown under this head.

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Loans and Advances

If the Insurance Company has deposited securities as cover in respect of any of these
items, the amount and nature of the securities so deposited must be clearly indicated under
this head. That is, if the company takes any loan or advances, the same must be shown.

Bills Payable

Any kind of bills with their total amounts, if they are accepted, must be shown under
this head.

Estimated Liabilities in respect of outstanding claims

The outstanding claims whether intimated/accepted and due or intimated but not yet
accepted and due have to be shown under this head.

Annuities due and unpaid

The annuities which are due and unpaid must be shown under this head in the liability
side of the Balance Sheet.

Outstanding Dividends

Outstanding dividends, interest, etc. must be shown after deduction of income-tax

under this head. Amount due to other persons or bodies carrying on insurance business:

Sundry Creditors:
o It includes also the outstanding expenses and taxes.
Other sums owing by the insurer:
Details of such sums are to be furnished. It includes premiums received in
advance etc.

Contingent Liabilities

It includes bills discount, uncalled capital of subsidiary companies, uncalled capital of

other investments etc.

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ASSETS SIDE

Loans

In case of Life and Annuity business, full particulars of holdings in and loan to
subsidiary companies must be stated, giving the name of each company, the number
description of each class of shares held, the amount paid up thereon and the value at which
the holding was shown in the Balance Sheet.

Investments

Since investments are very significant items on the asset side of the Balance Sheet,
full particulars of the same must be furnished. It must be remembered that land and house
properties are to be included in this head and order of arrangement will be on the basis of
safety of the same.

Agents Balances

It includes the balances due to the agents.

Outstanding Premiums

It means the premium which has become due but not yet received by the insurance
company.

Interests, Dividends and Rents outstanding:

It includes interest, dividends or rents which have already become due but not yet
received by the company.

Interest, Dividends and Rent Accruing but not due:

It expresses an income which is related to the financial period but would be due and
received in the next financial period. Since it is simply an income of the current year it is
shown as an asset in the asset side of the Balance Sheet.

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CONCLUSION

The insurance companies are required to prepare their financial statements i. e.

Revenue Account, Profit and Loss Account and Balance Sheet according to the Insurance
Regulatory and Development Authority (Preparation of Financial Statements and Auditors
Report of Insurance Companies) Regulations, 2002. The chief peculiarity of the life insurance
business is that the life insurance contracts are for a long term and that, on a particular date,
the future implications of a contract must be considered before profit can be ascertained.

Under an annuity contract, the life insurance office does not receive any amount after
the initial payment but has to go on paying till the annuitant dies. On a particular date,
therefore, there is a liability in respect of future payments to be made. Under a life insurance
policy, also, there is liability because against a policy, the premiums expected to be received
in future will generally be much less than the amount payable by way of the claim. Suppose,
A took out a policy for Rs 10,000 on 5th July, 1987 for twenty years, the premium being Rs
500 per annum.

REFERENCES

http://www.yourarticlelibrary.com/accounting/accounting-for-insurance-
company/preparation-of-final-accounts/preparation-of-final-accounts-of-life-
insurance-insurance-accounting/68871/
http://www.accountingnotes.net/final-accounts/final-accounts-of-life-insurance-
business/9510
www.slideshare.net/kirankurianphilip/accounts-of-insurance-companies
https://irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?