Determination of profit in life insurance business

Determination of profit in life insurance business

       A life insurance company earns profit when the life insurance fund exceeds its net liability. The net liability is the excess of present value of future claims of current policies over the present value of premiums to be received in future in respect of current policies. Net liability is to be compared with Life assurance fund on a particular date in order to calculate the surplus or deficiency.

                         Valuation Balance sheet

Liabilities            Amount.       Assets.             Amount

Net liability.          xxx.           Life fund.           xxx

Surplus.                 xxx.           Deficit.                xxx

(balancing figure).                 (bal.figure)                                                          xxx.                                         xxx

       As per the Life insurance corporation act 1956,95% of the surplus must be distributed to policyholders in the form of bonus in respect of with profit policies. The balance 5% may be utilized for such purposes as determined by the central government. Bonus​ payable to policyholders is calculated as follows:

Surplus as per valuation Balance sheet.                  xxx

Less: Actuarial expenses.                            xxx

       Dividends payable to policyholders. xxx.         xxx

                                                                                          xxx

Add:Interim Bonus.                                                      xxx

                   Net Surplus.                                                xxx