One of the many things that policyholders don’t think about when they have a claim is the IRS’s tax treatment of the settlement money. I am not a tax accountant, or any kind of accountant, so I am not about accounting practice 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 that will only be used for your insurance claim replacement and repairs.
Once the insurance company gives you the first check, go to your bank and open a separate account just to handle claims issues. When you receive payment for the claim, deposit it into this account. ONLY use this account for claim expenses. When the claim is completed, close the account.
Normally, when the insurance company provides advance payment against the loss of ALE or Contents. The checks will be paid just to you, because there is no mortgage on yours. Therefore, these checks can be deposited directly into your claim account.
DO NOT DEPOSIT GRANT CHECKS INTO YOUR REGULAR CHECKING OR SAVING ACCOUNT. Keeping a separate account for insurance claim-related expenses makes it easier to keep good records.
When you request an advance against your home cover, the insurance company will need to know the name and address of your mortgage company. The check will be issued in both your name and the name of the lender. They can mail the check to you. If they do, the lender will ask you to endorse the check and give them the check. Then they will set up a system of payment. For more information about this payment system, contact your mortgage company’s Escrow Department. Every lender is different. Find out what your lender plans to do by contacting them and asking.
The same procedure will likely apply when the insurance company issues a check for home repairs (or even a settlement for a car wreck). Anything you own that also has a lien holder or mortgage holder will be issued jointly in the name of the owner and the name in the name of the lien holder. If you own your home or vehicle free and clear, the insurance company will issue your settlement check only in the owner’s name.
ONLY USE THIS MONEY FOR THE CLAIM. Don’t take a weekend vacation in Las Vegas with the money, or buy yourself that new motorcycle you’ve always wanted. However, there are circumstances where you can use the money for whatever you like. You just won’t collect everything you should. Read Chapter 17, “Deduce That!”
There. I have said it in a number of different ways. Do not mix your personal money with your insurance money. Keep them entirely separate and you’ll have a more pleasant insurance claims experience.