FASB Technical Bulletin No. 85-4, “Accounting for Purchases of Life Insurance,” requires an entity that owns or is a beneficiary of a life insurance contract to carry the policy on its balance sheet at the amount that could be realized under the contract as of the reporting date, and to run the change in that amount through the income statement as an adjustment to premiums paid.1Financial Accounting Standards Board. FASB Technical Bulletin No. 85-4 – Accounting for Purchases of Life Insurance The guidance took effect for policies acquired after November 14, 1985, and now lives in ASC Subtopic 325-30.2Financial Accounting Standards Board. Status of Technical Bulletin No. 85-4
Who and What the Bulletin Covers
TB 85-4 applies to any entity that purchases life insurance where the entity is either the owner or the beneficiary of the contract, regardless of the reason for the purchase. Typical purposes include funding deferred compensation, backing buy-sell agreements, satisfying loan covenants, and providing postemployment death benefits.1Financial Accounting Standards Board. FASB Technical Bulletin No. 85-4 – Accounting for Purchases of Life Insurance
One boundary worth flagging: life settlement contracts, where a third party buys an existing policy from the original policyholder, sit outside this guidance and follow separate rules.
Measurement: The Amount That Could Be Realized
The asset is reported at the amount the policyholder could actually collect under the contract at the balance sheet date. In most cases that is the cash surrender value plus any additional recoverable amounts, less an allowance for credit losses.1Financial Accounting Standards Board. FASB Technical Bulletin No. 85-4 – Accounting for Purchases of Life Insurance
The phrasing matters. Some policies reduce the surrender value if a specified event occurs, such as a change in control of the policyholder or a tax net operating loss. If contractual terms make it probable that the collectible amount is less than the face cash surrender value, those limitations reduce the reported asset. You report what the contract would actually pay, not the number printed on the statement.
When recoverable amounts extend beyond one year, the codified guidance requires discounting future amounts to present value. Discounting is not needed if the policyholder continues earning the same rate of return on the cash surrender value after giving surrender notice. It matters when the insurer shifts the underlying investments to a lower-yielding portfolio once notice is filed.
How Income and Expense Are Recognized
The change in cash surrender value during the period is treated as an adjustment to premiums paid, and the net figure is the expense or income recognized under the contract for that period.1Financial Accounting Standards Board. FASB Technical Bulletin No. 85-4 – Accounting for Purchases of Life Insurance
A quick illustration. If premiums paid during the year are $100,000 and cash surrender value rises by $120,000, the entity recognizes $20,000 of income. If the same $100,000 in premiums is matched by only an $80,000 rise in cash surrender value, the entity recognizes $20,000 of expense. The netting prevents booking premiums as pure expense while separately reporting cash surrender value growth as investment income; both sides land on the same line.
Where the Guidance Lives Today: ASC 325-30
TB 85-4 is no longer the standalone authoritative reference. When the FASB reorganized U.S. GAAP into the Accounting Standards Codification in 2009, the bulletin’s content moved into ASC Subtopic 325-30, “Investments—Other: Investments in Insurance Contracts.” The measurement rule, income recognition approach, and scope carried over substantively unchanged. EITF Issue 06-5 later added guidance on determining the amount that could be realized, particularly for group policies covering multiple employees under a single contract.
For financial statements prepared today, cite ASC 325-30 rather than TB 85-4 directly. The bulletin remains useful for understanding the origin and logic of the codified requirements.
Application to Bank-Owned Life Insurance
Bank-owned life insurance, or BOLI, is the most common practical setting for this guidance. Banks buy policies on key employees and use the tax-advantaged growth of cash surrender value to help offset employee benefit costs. The FDIC directs banks to follow GAAP for life insurance products in both financial and regulatory reporting, specifically pointing to ASC Subtopic 325-30.3Federal Deposit Insurance Corporation. Bank-Owned Life Insurance (BOLI) Core Analysis Procedures
Concentration draws examiner attention. Risk management practices come under closer scrutiny when BOLI holdings approach or exceed 25 percent of Tier 1 capital.3Federal Deposit Insurance Corporation. Bank-Owned Life Insurance (BOLI) Core Analysis Procedures For risk-based capital, general account BOLI is risk-weighted at 100 percent. Separate account BOLI is weighted based on the riskiest permissible combination of assets in the separate account, subject to a 20 percent floor.
Not to Be Confused With SFAS 72
TB 85-4 is frequently mixed up with FASB guidance on regulatory assistance in acquisitions of failing banks and thrifts. That subject was addressed by SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions,” issued in February 1983, which covered goodwill from FDIC or FSLIC assistance in distressed bank mergers of that era.4Financial Accounting Standards Board. Superseded Standards SFAS 72’s content has since moved into ASC Topic 805 on business combinations. The two pronouncements share only the mid-1980s vintage; their subjects are unrelated.