Insurance Proceeds Details

If an individual or a business purchases insurance, they safeguard themselves against any accident that could lead to a financial loss. The insured pays premiums to the insurance company for this service. As part of the arrangement, the insurance company must compensate the proceeds against the insured's verified claims.

The payout of insurance proceeds happens once the insurance company has verified the claim. The insured is compensated accordingly for the loss that the policy protects. Insurance proceeds are sometimes paid directly to the health care provider (as with health insurance). Or it's sent to the insured in the form of a check.

Insurance proceeds are not issued when the individual insured files a claim right away. The process of assessing the claim must occur; the insurance agency will review the contract and the extent of the damage before proceeds are paid. Sometimes police reports are also requested by the insurance company.

Example of Insurance Proceeds

Insurance proceeds involve specialized financial reporting. If an insurance company pays a loss, the accountant will record the insurance proceeds' entire amount. An accountant should also record the full amount of the loss on company books.

A fire has destroyed $15,000 of current assets belonging to Company K. Since the insurance company provides a complete loss, the first entry is a $15,000 debit for fire damage. There is another entry of $15,000 credit for inventory to take away the accounting books' current inventory. The next entry is a $15,000 debit for cash-fire damages refund and a $15,000 credit for fire damages. This procedure balances out the amount of loss of fire damage to Company K's book.

Types of Insurance Proceeds

There are several types of insurance proceeds, and whether or not these proceeds are taxed also depends on the type of insurance or policy. The proceeds may be paid as a single payment by the insurance company or multiple installments over a given period. The type of payment will depend on the policy. Insurance proceeds are tax-free in most situations, irrespective of the nature of insurance or policy.

Disability insurance is taxable as income for the insured if the insured uses the pre-tax income to pay premiums. One more is when the homeowner collects insurance proceeds for a damaged or destroyed home. The homeowner collects proceeds that surpass the adjusted basis of the property. In this scenario, the profit is taxed as a capital gain unless a substitute property is acquired.

Generally, when a person is given insurance proceeds from a life insurance policy due to the insured person's death, the payment is not taxable. You're not obligated to declare it as income. However, interest income is taxable and can be reported as interest received. If a life insurance policy has been transferred to you for cash or other valuable property, this same exemption of the insurance proceeds is restricted to the amount of the evaluation you paid. It's also limited to the extra premiums you paid and perhaps other amounts. There are exceptional cases to this, though. Generally, you document a taxable amount depending on the type of income document you receive.