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Limited-payment contracts provide a specified, fixed amount of insurance benefit that extends beyond the period or periods in which premiums are collected (e.g., single pay life insurance contract, five-year pay whole life insurance, single premium life-contingent payout annuity). GAAP guidance requires that the liability for future policy benefits attributable to limited-payment contracts be calculated consistent with the accounting for nonparticipating long-duration contracts if the terms of the contract are fixed and determinable. See IG 5.2 for additional information on the measurement of nonparticipating traditional insurance contracts.
Under the accounting for nonparticipating long-duration contracts with premiums received over the entire life of the contract (traditional life insurance), any gross premium received in excess of the net premium is recognized in income when received. However, in the limited-payment model, the collection of premium does not represent the completion of the earnings process, so any gross premium received in excess of net premium must be deferred initially. The deferred revenue amount is known as the deferred profit liability (DPL). ASC 944-605-35-1A requires the DPL to be amortized in relation to the discounted amount of the insurance in force (for life insurance contracts) or expected future benefit payments (for annuity contracts). As the calculation of the DPL is based on discounted cash flows, interest accrues on the unamortized DPL balance.
The guidance does not specify where to present the DPL and subsequent amortization of the DPL within the balance sheet or income statement. Refer to IG 10.2.1 for further information. The liability for future policy benefits attributable to limited-payment contracts is consistent with the accounting for nonparticipating traditional insurance contracts. Refer to the table in Figure IG 5-3 for additional references to guidance within this guide.
Figure 5-3
Guidance on measuring the liability for future policy benefits
Reference
Topic
IG 5.2.1
Estimating the liability for future policy benefits
IG 5.2.2
Liability assumptions in the net premium ratio
IG 5.2.3
Discount rate assumption
IG 5.2.4
Updating assumptions in the liability for future policy benefits
IG 5.2.5
Loss contracts - future policy benefits
IG 5.2.6
Level of aggregation - future policy benefits

5.3.1 Changes to the liability for future policy benefits and DPL

For limited-payment contracts, the updating of cash flow assumptions and resulting retrospective updating of the net premium ratio impacts not only the liability for future policyholder benefits, but also the amount of the DPL. The DPL will also be adjusted on a retrospective catch up basis, contemporaneous with any updating of the liability for future policy benefits.
The remeasurement gain or loss in net income for the current reporting period as a result of updating cash flow assumptions is described in ASC 944-605-35-1C.

Excerpt ASC 944-605-35-1C

  1. Cash flow assumptions used to calculate the deferred profit liability at contract issuance shall be updated in subsequent periods using actual historical experience and updated future cash flow assumptions.
  2. The recalculated deferred profit liability as of the contract issue date shall be subsequently amortized in accordance with paragraph 944-605-35-1A to derive the revised deferred profit liability estimate as of the beginning of the reporting period.
  3. The revised deferred profit liability estimate calculated in (b) shall be compared with the carrying amount of the deferred profit liability as of the beginning of the current reporting period to determine the change in the estimate adjustment to be recognized in net income of the current reporting period (see paragraph 944-40-45-4).

Insurance entities should complete the following steps in order to reflect the updating of cash flow assumptions within the liability for future policy benefits and DPL for limited-payment contracts in subsequent periods:
  • Update cash flow assumptions used to calculate the liability for future benefits and the DPL at contract issuance using actual historical experience and updated future cash flow assumptions (see IG 5.2.4).
    • Updated insurance in force or expected benefit payments are discounted using the original contract issue date discount rate.
  • Using the updated DPL as of the contract issue date, recalculate subsequent amortization based on the updated discounted amount of insurance in force (for life insurance) or expected future benefit payments (for annuity contracts) to derive the revised DPL estimate as of the beginning of the current reporting period.
  • Compare the revised DPL to the carrying amount of the DPL as of the beginning of the current reporting period to determine the remeasurement gain or loss.
The guidance does not specify the categorization of the remeasurement gain/loss in net income other than requiring presentation separately in net income, either parenthetically or as a separate line item (see IG 10.2.1.1). If an insurance entity chooses to present the remeasurement gain/loss parenthetically, we expect it to be in the same revenue or expense category where DPL amortization is recognized. See IG 10.2.1 for further details on the presentation of DPL amortization.
Interest will accrue on the unamortized DPL at the original contract issue date discount rate.
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