One of the many things that policyholders don’t think about when they have a claim is the IRS tax treatment of the settlement money. I’m not a tax accountant, or any kind of accountant, so I’m not about to practice accounting or tax law here in this article. But, the one thing I know that will help protect you from the wrath of the IRS is to open a special checking account which will only be used for your insurance claim replacements and repairs.
Once the insurance company issues you the first check, go to your bank and open a separate account just for handling claims issues. When you receive the payments for the claim, deposit them in this account. ONLY use this account for the expenses of the claim. When the claim is completed, close the account.
Normally, when the insurance company issues advance payments against the ALE or Contents losses. the checks will be made payable just to you, because there’s no mortgage on your contents. So, those checks can be deposited directly into your claim account.
DO NOT DEPOSIT THE SETTLEMENT CHECKS IN YOUR NORMAL CHECKING OR SAVINGS ACCOUNT. Keeping a separate account for insurance claim related expenditures makes it so much easier to keep good records.
When you ask for an advance against your Dwelling coverage, the insurance company will need to know the name and address of your mortgage company. They will issue the check jointly in your name and the name of the lender. They may send the check to you. If they do, the lender will likely require you to endorse the check and give the check to them. Then, they will set up a system of payments. To find out more about that system of payments, contact the Escrow Department of your Mortgage Company. Every lender is different. Find out what your lender plans to do by contacting them and asking them.
The same procedure will likely apply when the insurance company issues checks for repairs to the dwelling (or even a settlement for a car wreck). Anything you own that also has a lienholder or mortgage holder will be issued jointly in the name of the owner and the name of the lienholder. If you own your dwelling or vehicle free and clear, the insurance company will issue your settlement check only in the name of the owner.
ONLY USE THIS MONEY FOR THE CLAIM. Don’t take a weekend vacation to Las Vegas with the money, or buy yourself that new motorcycle you’ve always wanted. However, there are circumstances in which you can use the money for whatever you like. You just won’t collect all you should. Read Chapter 17, “Deduct This!”
There. I’ve said it in a number of different ways. Don’t come with your personal funds and your insurance settlement funds. Keep them entirely separate and you’ll have a much more pleasant insurance claims experience.