Certain life insurance companies have in recent years inaugurated the practice of lending their surplus funds on mortgages at a low rate of interest and free of brokerage, on condition that the mortgagor take out with the lender a life insurance policy, to such an amount that the annual premiums will amount to, say, 5% of the amount of the loan, and will undertake to maintain this during the life of the loan. The policy may be taken out either on himself or on others designated by him, and, in the event of the death of one of the insured during the period of the loan, the insurance is credited to the loan.

Such agreements must be carefully examined to determine the proper disposition of moneys paid for premiums. The interest payments are, of course, treated like all other interest on mortgages payable. The premiums may be charged to a Life Insurance account and carried as an asset during the life of the loan. In event of the death of one of the assured, the amount of insurance collectable, less the premiums paid, may be debited to Mortgages Payable account and credited to a special surplus account.

In the event that none of the assured dies and the mortgage is satisfied when due, the amounts paid as premiums may remain as an asset if the policies are continued for the benefit of the business, or if they have an exchange or surrender value equal in amount to these premiums. If, however, the policies have no such value, the premiums must be written off to Profit and Loss. On this account, proper arrangements should be made at the time the loan is entered on the books, to avoid the possibility of having to write off a considerable sum at the end of a few years.