Question

Warren Inc. purchased a $400,000 life insurance policy on the company president on January 1, 2017. The premium that was paid on January 1 amount to $11,60. In the first year, cash surrender value increased by $900 and dividends received by Warren from the insurance company for the year amount to $300. What was Warren's insurance expense for 2017?

Select one:

a. $12,500

b. $12,800

c. $10,400

d. $11,000

Answer 1

The life insurance policy is for $ 400,000 as take by Warren.

This is neither income nor expense as it is the insured amount for Warren on his life.

As far as premium is concerned the amount paid by Warren for year is $ 11,600. This premium is an expense against which the policy continues and such premium amount needs to be paid annually to the company.

However, dividend has been revived by Warren of $ 300 which is an income to him and such income will reduce the expense for that year.

Also cash surrender value for policy has increased by $ 900 for the first year. This value is the amount offered by company to policy holder on cancellation of life insurance policy. Therefore, such amount will also reduce the expense as it is an inflow.

Thus, net expense for Warren for insurance is :-

$ 10,400 ( $ 11,600 - $ 300 - $ 900)