To realize the effect on the “bottom line,” or the net gain from operations, from various transactions, one must consider the amount of any…

The net effect on the gain from operations is determined by the death benefit expense incurred, offset by the release of liabilities associated with the terminated policy. The primary expense is the death proceeds of $10,000. This expense is reduced by the release of the policy reserve liability, which is $3,000. Therefore, the net impact on the income statement is a reduction of $7,000 ($10,000 - $3,000). The payment of "Dividends on deposit" ($1,000) is a settlement of a previously established liability and does not affect the gain from operations; it is a financing cash flow that reduces both cash and the corresponding liability on the balance sheet.

B. $10,000: This is incorrect because it represents the gross death benefit expense without accounting for the offsetting release of the $3,000 policy reserve liability.

C. $8,000: This figure does not correspond to any standard accounting calculation for the net impact of a death claim on operational gain.

D. $9,000: This is incorrect as it might arise from improperly subtracting the dividend liability from the death benefit, which are separate accounting items.

1. Herget

T. E.

et al. (2006). U.S. GAAP for Life Insurers

Second Edition. Society of Actuaries. Chapter 10: The Income Statement.

Section 10.3

"Benefits and Reserve Increases

" explains that the income statement reflects benefits incurred and the change in policy reserves. For a death claim

the benefit is an expense

but the reserve for that specific policy is released

creating a credit (a decrease in the aggregate "Increase in Reserves" line item). The net effect is the benefit paid less the reserve released. In this case

$10

000 (benefit) - $3

000 (reserve release) = $7

000 net expense.

2. Tiller

J. E.

& Tiller

J. (1995). Life

Health

and Annuity Reinsurance. ACTEX Publications. Chapter 11: Financial Reporting.

Page 289

in discussing the analysis of surplus

notes that surplus is decreased by death claims in excess of reserves released. This principle directly supports the calculation: Net Decrease in Surplus = Death Claim - Reserve Released.

3. Strain

R. W. (Ed.). (1980). Life Insurance Accounting. The Merritt Company.

Chapter 5

"The Income Statement

" details the components of the Summary of Operations. It shows that "Death benefits" are a charge against income

while the "Increase in reserves" is also a charge. When a death claim occurs

the reserve for that policy is released

which contributes a negative value to the "Increase in reserves" line

thus offsetting the death benefit expense. The net impact on the gain from operations is the claim amount less the reserve held for that policy.