Insurance Expense

What is Insurance Expense?

Insurance expense is the amount that a company pays to get an insurance contract and any additional premium payments. The payment made by the company is listed as an expense for the accounting period. If the insurance is used to cover production and operation, then the insurance expense can be listed in an overhead cost pool and divided into each unit produced during the period.  When this occurs, part of the insurance expense will be listed in ending inventory, and some of it will be listed under cost of goods sold (COGS).

The company must pay premiums on all its insurance policies. The policies are intended to cover not only its property and products but also to protect its workers. All policies come with premiums. If they expire, they must be recorded as an expense. Unexpired premiums should be listed as prepaid insurance, which is listed in an asset account.

Property/Liability/Casualty Insurance

Property, liability, and casualty insurance is usually sold as a bundle. Obviously, property insurance covers the building and land that a company owns, as well as whatever is inside. Casualty and liability insurance deals mainly with the company’s workers and anything that may happen to them while they are working.

The good news for companies about such types of insurance is that they can be deducted from tax liability as a business expense. It depends, of course, on the type of business. However, most companies can deduct such expenses on their income tax forms in order to get a tax break.

Insurance Expense vs. Insurance Payable

Insurance expense is the charge that a company takes on for the insurance policy or policies it wants to protect itself and its workers. The agreement is that, as the policyholder, the company pays premiums on the policies. The policies are designed to protect the company – and employees – from anything adverse that might happen.

Insurance payable is debt that is related to insurance expense. It shows the amount of the company’s unpaid premiums. The unpaid expenses must be settled as quickly as possible. In most cases, the goal is to get them paid by the end of the current period to avoid additional late charges or being dropped by the insurance company altogether. Insurance payable is a part of a corporate balance sheet.

Insurance expense and insurance payable are two different things, yet they are interrelated. One does not exist without the other. There would be no need for an insurance payable account if there were no insurance expense.

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Contingent Liability
• Deferred Tax Liability/Asset
• Insurance Deductible
• Loss Ratio
• Fidelity Bonds
• See all accounting resources