Under GAAP, costs that vary with and are primarily related to the acquisition and issuance of insurance policies are known as:

Question

Options

• Aapplication assistance policy costs
• Binsurance policy acquisition costs
• Cdeferred policy acquisition costs
• Dcause and effect costs

• A
  9% (5)
• B
  2% (1)
• C
  85% (47)
• D
  4% (2)

Explanation

Under GAAP, costs that vary with and are directly related to acquiring and issuing insurance policies are specifically called deferred policy acquisition costs (DPAC) - option C - because these costs (agent commissions, underwriting fees, medical exams) are capitalized on the balance sheet and amortized over the policy's life rather than expensed immediately.

Why the distractors are wrong:

• A (application assistance policy costs) is fabricated terminology that does not exist in GAAP or insurance accounting standards.
• B (insurance policy acquisition costs) is close but incomplete - the critical word is deferred, which captures how these costs are treated on the balance sheet; without "deferred," it doesn't describe the accounting concept.
• D (cause and effect costs) refers to a general matching principle concept, not a specific insurance accounting term.

Memory tip: Think of the acronym DPAC - Defer Paying Acquisition Costs - reminding you that instead of hitting the income statement right away, these costs get parked on the balance sheet and spread out over time, matching expenses to the premiums earned over the policy period.

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