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Category: Finance
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Experience:  Tax professional and business consultant for 35 years.
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I need to treat the cash surrender value of life insurance

Customer Question

I need to treat the cash surrender value of life insurance from a balance sheet as a non-operating asset. The current value of this asset is $280,000. There is also a shareholder loan receivable on the balance sheet in the amount of $90,000, related to the cash surrender value.
This following is from the financial statement notes: "The company has a loan receivable from the stockholder for money advanced to him totaling $90,000. This loan receivable consists of money advanced to the stockholder from proceeds of a loan on the life insurance policy. The loan is due on demand and carries an interest rate of 4.25%. The company does not expect to receive any payment in the next year, therefore we have classified the loan as long-term debt."
What is the correct way to account for the cash surrender value? If that shareholder loan receivable were non-existent, I would just take out the cash surrender value and make an adjustment to retained earnings, but the loan receivable is throwing me off.
Submitted: 1 year ago.
Category: Finance
Expert:  PDtax replied 1 year ago.
Hi from just answer. I'mCustomer I'll assist.
Expert:  PDtax replied 1 year ago.
Classify the cash surrender value of officer life as a noncurrent asset, net of the loan to the shareholder if you like, at $90,000. Or, report the shareholder loan as a noncurrent liability as well. Most financial statement presentation would show it at net of $190,000 with the footnote disclosure you cited.Thanks for asking at just answer. Please rate my assistance with positive feedback to complete your inquiry. I'mCustomer
Customer: replied 1 year ago.
I'm sorry, but I don't understand how I can treat the shareholder loan receivable as a non-current liability, given that it's an asset.
Expert:  PDtax replied 1 year ago.

When I thought of the cash surrender value as an asset, the loan against that is a liability. Loaning that cash to the shareholder is an asset, but there is still a liability to book against the cash surrender value asset.

My mistake. You should have:

Debit CSV, at gross 280k

Debit shareholder loan, 90k

Credit insurance loan. 90k

Credit from (years of) key man life expenses. 280k

I did not know the mechanics of the loan, or of your history in booking the CSV asset. When the check was cut for the loan, both a liability against the CSV and a debit to the receivable is booked to set up the loan. The debit to cash and credit for the same check cut offset each other.

Customer: replied 1 year ago.
That makes sense. So then back to the original question - how are these various items treated in terms of removing them from the balance sheet and accounting for them as non operating items? Is the $280k the only item that is treated as a non operating asset because the shareholder loan and insurance loan negate each other?
Expert:  PDtax replied 1 year ago.

I like to report CSV net of any loans, and refer to the footnotes to explain. That could be CSV - net of 190k.

That, and the shareholder loan, are both non operating assets.

So, I agree with your classification, but I present two assets, one at 190 (net) and the other as 90.

Expert:  PDtax replied 1 year ago.

Hi again.Customerhere.

If my response met your needs, please rate my assistance to close out your request. If you have follow up questions, please ask.