Under International Accounting Standards, GAAP, or both, if an
insurance company pays sales commissions to agents who sell
Policies, where the purchaser pays for the policy in installments over
a five year period, and where the purchaser is not legally obligated
to complete the payments but receives only a "termination value" (or
cash value) increasing over the pay-in period from zero percent to 50
percent of the amount he's paid if he chooses not to complete the
payments, and where the sales agent receives almost all of the sales
commission the year the policy is sold, must these commissions be
expensed in the year paid, or may they be capitalized by the insurance
company as “deferred commissions” and amortized over the pay-in
period?

Hello and thank you for your question.

The sales commissions that you describe are required to be
capitalized; they should not be expensed in the year paid.

The Financial Accounting Standards Board (FASB) sets GAAP in the
United States. The authority that controls your question is Statement
No. 60,
Accounting and Reporting by Insurance Enterprises (Issued 6/82).  
I cannot quote extensively from Statement No. 60 because FASB is
zealous about protecting its copyright.  But in summary, Statement No.
60 as modified in certain respects by Statement No. 97 provides that
"[c]osts that vary with and are primarily related to the acquisition
of insurance contracts (acquisition costs) are capitalized and charged
to expense in proportion to premium revenue recognized."
Summary of Statement No. 60
http://www.fasb.org/st/summary/stsum60.shtml
Summary of Statement No. 97
http://www.fasb.org/st/summary/stsum97.shtml

The full text of Statement No. 60 and No. 97 can be purchased online:
Full text of FASB Statements and other publications 
http://stores.yahoo.com/fasbpubs/

There is an ongoing controversy that may affect this treatment in the
future.  FASB has issued a "Preliminary Views Document on Reporting
Financial Instruments and Certain Related Assets and Liabilities at
Fair Value."  The recent stock market and accounting scandals are
placing increased emphasis on finding the "fair value" of financial
instruments for reporting purposes.
How People See Fair Value Accounting? 
http://www.insurance-finance.com/finance/fairvalue.htm

But for the for now, you have the answer.

Search terms used:
gaap capitalized insurance deferred commissions
"statement 60" fasb
"statement 60" insurance "acquisition costs"

If you have any questions about this Answer, I would appreciate it if
you would post a Clarification Request and please hold off on rating
my answer until I have an opportunity to reply.

Sincerely,
richard-ga

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Request for Answer Clarification by soupfly-ga on 23 Aug 2002 23:33 PDT

Your answer is exactly what I need, thanks.  (THe only thing that
would have made it better would have been if you threw in an IAS-based
answer!).  I will put in a good rating, but I wanted to write you
first to find out how I go about getting you to answer my other
accounting question that I posted.  It is about how the insurance
company should account for the installment contract receivables, given
that the purchasers aren't obligated to complete their payments. 
Someone else answered it and it was not the kind of answer I needed. 
I am willing to pay again if I have to.  Can you or Google let me know
how to go about this?  thanks - soupfly

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Clarification of Answer by richard-ga on 24 Aug 2002 04:51 PDT

Thank you for your reply, I'm glad you have what you need.  Those
answer-stars actually mean a lot to us.

If there is a question that you want me to consider, you should select
'Ask a Question,' write it up as a new question, and make 'question
for richard-ga' part of the title.  I will either answer it or I will
reply by Request for Clarification to tell you if I have any problem
with it.

As to the question that you asked previously, Google's FAQ states that
you will only be charged the price you set when and if your question
is answered to your satisfaction.  If you are unsatisfied you can
email the question number to answers-editors@google.com and tell them
so.

Sincerely
richard-ga

right on target