What are Insurance Proceeds?

Insurance proceeds are monetary benefits paid by an insurance company after a claim has been verified. These may be paid directly to the policy holder, or may go to cover debts for covered services, such as hospital bills. It is very important to keep track of insurance proceeds received, as they may be subject to taxation in some situations.

Insurance is an agreement between a policy holder and an insurance company that guarantees financial coverage under certain circumstances in return for yearly or monthly premiums. Some common types of insurance include auto coverage, life insurance, homeowner or renter insurance, and health care insurance. If an insured item, such as a car, suffers damage caused by another person, the insurance company will usually pay for repairs or give the policy holder the value of the car if it is beyond repair. It is important to note that all insurance policies carry stipulations about what type of accident or injury constitutes grounds for a claim; even something as simple as going to a new mechanic that the insurance company doesn't work with can result in insurance proceeds not being paid.

Life insurance is one area in which insurance proceeds are common. Life insurance provides monetary support to a beneficiary in the event of the death of the policy holder. Usually, the only thing that prevents insurance proceeds from being paid to a beneficiary is if the policy holder committed suicide or the beneficiary is suspected of murdering the policy holder. In some cases, however, life insurance proceedings are taxable if the beneficiary has purchased the policy for the policy holder. The taxable income in this case is usually the amount of the proceeds minus anything the beneficiary has paid in premiums or consideration given by the beneficiary to the policy holder.

Another common question about insurance proceeds is whether they must be used for benefit of the insured item. If an insurance company pays proceeds directly to a client whose car was damaged in an accident, for instance, must that money go to pay for repairs? Unless an insurance policy specifies something to that effect, most of the time the proceeds can be used for whatever the recipient chooses. Imagine, for example, that a person paid for the car repairs out of pocket and thus couldn't pay his water bill that month; when the proceeds from the insurance arrived, it is often perfectly acceptable to use the money to pay the water bill.

An exception to this general rule are homeowner insurance proceeds. If proceeds exceed the adjusted value of an insured house, the homeowner may be subject to a capital gains tax. If the money is quickly used to buy another comparable property, this tax may be avoidable.

It is important to remember that almost all questions about insurance proceeds will depend on the specifications of the insurance policy. Policy rules are often very complicated and may have hundreds of loopholes and hidden details that change how proceeds are handled and distributed. It is important to contact the insurance company with any specific questions regarding how proceeds are distributed, how they may be used, and whether they will be taxed.