How to Categorize Insurance Claim Proceeds?


M

Margaret Wilson

My employer offers long-term disability only, so I have purchased a
"mortgage disability" insurance policy that reimburses me for the amount of
my mortgage payment (30-day exclusion period) for a period of up to three
years. (For those of you who ask why I would buy such a policy, it's cheap
coverage, I'm a single person, and I have a chronic illness.)

Anyway, I was recently off work for almost 10 weeks due to surgery, so I
made a claim on this policy. I'm told that I do not pay tax on the proceeds
of claims made on such policies, because this income is obtained by my
paying a premium for the coverage. So my question is, now that the
insurance company has paid my claim, how do I categorize the deposit?

The options I see so far:

1. I have a main "Income Sal" category, but I don't want to create a
subcategory under that, since this is not related to salary (though the
claim proceeds do replace part of it).

2. I could create a new "Disability Income" category, but I don't
particularly like that option (not sure why).

3. I also have an "Insurance" expense category (for premiums) and could
create a subcategory "Claim Proceeds" under that. (Except I'd be using an
expense category for income in this case.)

4. Finally, I could simply use the category I use to record the premiums
paid ("Insurance:Disability"), but then that messes up report totals for
insurance premiums paid.

Ideas?

Thanks and Regards,

Margaret
 
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R

Rick Hess

Margaret Wilson said:
My employer offers long-term disability only, so I have purchased a
"mortgage disability" insurance policy that reimburses me for the amount of
my mortgage payment (30-day exclusion period) for a period of up to three
years. (For those of you who ask why I would buy such a policy, it's cheap
coverage, I'm a single person, and I have a chronic illness.)

Anyway, I was recently off work for almost 10 weeks due to surgery, so I
made a claim on this policy. I'm told that I do not pay tax on the proceeds
of claims made on such policies, because this income is obtained by my
paying a premium for the coverage. So my question is, now that the
insurance company has paid my claim, how do I categorize the deposit?

The options I see so far:

1. I have a main "Income Sal" category, but I don't want to create a
subcategory under that, since this is not related to salary (though the
claim proceeds do replace part of it).

2. I could create a new "Disability Income" category, but I don't
particularly like that option (not sure why).

3. I also have an "Insurance" expense category (for premiums) and could
create a subcategory "Claim Proceeds" under that. (Except I'd be using an
expense category for income in this case.)

4. Finally, I could simply use the category I use to record the premiums
paid ("Insurance:Disability"), but then that messes up report totals for
insurance premiums paid.

Ideas?
I have an income category similar to your #2 called "Insurance Proceeds" or
"Insurance Settlements" -- can't remember what I call it.

You'll probably get responses that say to use your #3 or #4, with various
reasonings. I never liked that scheme. Although it's not taxable, it IS
income. When you run reports on medical expenses, you can include the
insurance payments so you know what to put on your Schedule A.
--


Rick Hess
New Orleans
To reply, eliminate All_Spammers
 
J

Jim M.

I trust you will find some humor in this response ---
You could have just cashed the check (no deposit) and saved all of us
(including you) from this dilemma!

But since you already have made the deposit, I like your option #3
When included in your reports, you captured the gross cost of you insurance
as well as the net cost of the insurance and that answers the question, was
it money well spent. (you have already decided it was well spent, so that
might not be the question)
For what ever reason, I like #3.
Jim M.
 
D

Dick Weaver

Margaret said:
My employer offers long-term disability only, so I have purchased a
"mortgage disability" insurance policy that reimburses me for the amount of
my mortgage payment (30-day exclusion period) for a period of up to three
years. (For those of you who ask why I would buy such a policy, it's cheap
coverage, I'm a single person, and I have a chronic illness.)

Anyway, I was recently off work for almost 10 weeks due to surgery, so I
made a claim on this policy. I'm told that I do not pay tax on the proceeds
of claims made on such policies, because this income is obtained by my
paying a premium for the coverage. So my question is, now that the
insurance company has paid my claim, how do I categorize the deposit?

The options I see so far:

1. I have a main "Income Sal" category, but I don't want to create a
subcategory under that, since this is not related to salary (though the
claim proceeds do replace part of it).

2. I could create a new "Disability Income" category, but I don't
particularly like that option (not sure why).

3. I also have an "Insurance" expense category (for premiums) and could
create a subcategory "Claim Proceeds" under that. (Except I'd be using an
expense category for income in this case.)

4. Finally, I could simply use the category I use to record the premiums
paid ("Insurance:Disability"), but then that messes up report totals for
insurance premiums paid.

Ideas?
This is stream of thought, relying on R.C. White to correct!

First, consider a simpler example. Your have an auto
accident, $1000 in repairs and the insurance company pays $800. Two
ways this can happen are
1. You pay the $1000, insurance pays you $800
2. You pay $200, insurance pays repairman $800
The Quicken entries should have the identical results. The first might
be entered as cat:autorepair -1000, cat:autorepair +800 and the second
as cat:autorepair -200 . Both have the same result, net autorepair is
-200.

In your case, the insurance company was obligated for your mortgage
payments, the same two possibilities exist:
1. You make payments, insurance company reimburses you
2. You make no payment, the insurance company makes the mortgage
payments

Again, we want the Quicken entries for these to have the identical
result. Well, almost identical. There is a tax complication. If you
itemize deductions, including mortgage interest, and the insurance
reimbursement occured in a different year than the year some payments
being reimbursed were made - then the portion of your reimbursement that
was for a prior year's interest IS TAXABLE INCOME in the year the
reimbursement was received (according to IRS instructions - which may
not present all alternatives). And, of course, if the reimbursement is
in
the same year, then the amount you itemize for mortgage interest that
year must be reduced by the amount of interest reimbursed.

Lets try the case where the insurance company makes the mortgage
payment. They walk in the first of the month and say skip this months
payment ($800 interest, 200 principal), we'll take care of it. What do
you record in quicken?

In your checking account

payee:ABC Ins 0
splits
Insuranceincome 1000
interest-non-ded -800 insurance paid interest
[loan account] -200 insurance paid principal

For the equivalent transaction, when given the $1000 check, we make the
following deposit entry in the checking account:

Payee: ABC Ins 1000
splits:
insuranceincome 1000
interest +800 reduce tax deductable interest
interest-non-ded -800 increase tax non-ded interest

So that's the entry I'd make. If the reimbursement was for multiple
years, I'd make an entry for each year.

So it's option 2 - you need an income category (non taxable) to track
it. As well as an interest-non-ded category (I think).

dick w
 
M

Margaret Wilson

Thanks to all for your comments. I ultimately went with variation on Rick's
suggestion (#2). I created a category "Insurance Proceeds" and a
"Disability" subcategory under that. This way it stays separate from my
salary income, yet it can be included in various reports as necessary.
What's more, if I later want to track claim proceeds on other types of
insurance, I can create additional subcategories.

Regards,

Margaret
 
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R

R. C. White

This is stream of thought, relying on R.C. White to correct!

Thanks a lot, Dick! ;^{

As usual, your analysis seems right to me. As you point out, the interest
portion of the payment made by insurance will be "a wash", whether paid
directly by the insurance company or by checks into and out of the insured's
bank account. The only problem might be if the payment and reimbursement
fell in different years, as you said.

I'm not sure about the tax treatment of the principal portion of the
payment. The accounting treatment is clear: the loan balance is reduced
and the insurance proceeds are income.

Who told you this, Margaret? If it is a CPA or tax attorney who is
well-versed in the current tax rules, I'd go with that advice. NOT MY
advice, since I've been retired for over a decade and (1) my memory has
faded; (2) what I do remember clearly is not always true anymore; and (3)
falling back on common sense and reasoning doesn't always work, because
that's not how tax laws and rules are made. :>(

Disability insurance has always been an arcane area full of quirks that
often seem counter-intuitive and self-contradictory. I recall that it often
does matter whether the premium is paid by the taxpayer or by her employer,
but I don't remember just how that distinction affects taxability of the
insurance proceeds. This is not typical "disability income" in the sense
that it supports the taxpayer when she is unable to work, or that it
replaces earned income - exactly. There may well be some IRS rulings on
this specific point. To give a good answer, I'd have to study the current
literature and I have neither the time nor the library to do it now. Dick
is more familiar with the current tax situation, so his analysis probably is
correct.

Please let us know if you find a definitive answer.

RC
--
R. C. White, CPA
(Retired - no longer licensed to practice)
San Marcos, TX
(e-mail address removed)

Dick Weaver said:
Margaret said:
My employer offers long-term disability only, so I have purchased a
"mortgage disability" insurance policy that reimburses me for the amount
of
my mortgage payment (30-day exclusion period) for a period of up to three
years. (For those of you who ask why I would buy such a policy, it's
cheap
coverage, I'm a single person, and I have a chronic illness.)

Anyway, I was recently off work for almost 10 weeks due to surgery, so I
made a claim on this policy. I'm told that I do not pay tax on the
proceeds
of claims made on such policies, because this income is obtained by my
paying a premium for the coverage. So my question is, now that the
insurance company has paid my claim, how do I categorize the deposit?

The options I see so far:

1. I have a main "Income Sal" category, but I don't want to create a
subcategory under that, since this is not related to salary (though the
claim proceeds do replace part of it).

2. I could create a new "Disability Income" category, but I don't
particularly like that option (not sure why).

3. I also have an "Insurance" expense category (for premiums) and
could
create a subcategory "Claim Proceeds" under that. (Except I'd be using
an
expense category for income in this case.)

4. Finally, I could simply use the category I use to record the
premiums
paid ("Insurance:Disability"), but then that messes up report totals for
insurance premiums paid.

Ideas?
This is stream of thought, relying on R.C. White to correct!

First, consider a simpler example. Your have an auto
accident, $1000 in repairs and the insurance company pays $800. Two
ways this can happen are
1. You pay the $1000, insurance pays you $800
2. You pay $200, insurance pays repairman $800
The Quicken entries should have the identical results. The first might
be entered as cat:autorepair -1000, cat:autorepair +800 and the second
as cat:autorepair -200 . Both have the same result, net autorepair is
-200.

In your case, the insurance company was obligated for your mortgage
payments, the same two possibilities exist:
1. You make payments, insurance company reimburses you
2. You make no payment, the insurance company makes the mortgage
payments

Again, we want the Quicken entries for these to have the identical
result. Well, almost identical. There is a tax complication. If you
itemize deductions, including mortgage interest, and the insurance
reimbursement occured in a different year than the year some payments
being reimbursed were made - then the portion of your reimbursement that
was for a prior year's interest IS TAXABLE INCOME in the year the
reimbursement was received (according to IRS instructions - which may
not present all alternatives). And, of course, if the reimbursement is
in
the same year, then the amount you itemize for mortgage interest that
year must be reduced by the amount of interest reimbursed.

Lets try the case where the insurance company makes the mortgage
payment. They walk in the first of the month and say skip this months
payment ($800 interest, 200 principal), we'll take care of it. What do
you record in quicken?

In your checking account

payee:ABC Ins 0
splits
Insuranceincome 1000
interest-non-ded -800 insurance paid interest
[loan account] -200 insurance paid principal

For the equivalent transaction, when given the $1000 check, we make the
following deposit entry in the checking account:

Payee: ABC Ins 1000
splits:
insuranceincome 1000
interest +800 reduce tax deductable interest
interest-non-ded -800 increase tax non-ded interest

So that's the entry I'd make. If the reimbursement was for multiple
years, I'd make an entry for each year.

So it's option 2 - you need an income category (non taxable) to track
it. As well as an interest-non-ded category (I think).

dick w
 
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