Insurance is undertaken to tide over uncertainties in life or business activities. Life insurance plans which have a cash value component are considered an asset. Insurance is an expense to a business and is carried as prepaid expense (paid in advance) under the head of current assets in the balance sheet of a company till it is paid.
Asset refers to the amount one invests in resources, in order to earn value overtime on their invested amount. Assets can be liquid (e.g., cash) or illiquid (e.g., private equity in a business). They can appreciate or depreciate.
Assets are of two main types
- Tangible Assets - Assets that can be felt or touched, for example, home, jewellery
- Intangible Assets – Assets that cannot be touched, for example, patents, trademarks
Then, what kind of an asset is insurance?
Under life insurance, permanent life insurance policies like whole life insurance, universal life insurance etc. which have a savings component as part of their insurance plan are considered as an asset. Term life insurance which is for a specific time period does not give a cash value component, as such not considered as an asset.
Insurance that is paid in advance is considered as a prepaid expense under the current asset in the balance sheet of the company. Once the insurance amount becomes due it is considered an expense.
Important Points to Consider:
Insurance is generally considered an expense in business unless paid in advance
Permanent life insurance plans with a savings component are considered assets