Before we start diving into the details of insurance settlement, it is important to understand its definition. A settlement in itself means that you would collect a certain amount of money over a certain period of time as a result of a personal injury. These payments can spread over several years, giving you a fixed income over a time period and is advantageously taxed both on the state and federal level. The only disadvantage is that once you have agreed upon the structure of payment, you can not decide half-way that you want to be paid in a one-time lump sum.
What if you encounter a financial burden and need the money immediately? It does not matter what you need it for, whether it is an emergency medical expense or because you want to make an investment or you simply want to purchase something for you to enjoy. The bottom line is, you need the money fast.
Insurance settlements can be the option to help solve your problem. You can sell off your settlement in exchange for liquid cash. You can decide to sell the whole amount of your settlement or just a portion of it. The idea is that you sell the rights to receive the amount in exchange for an amount you agreed upon.
There is no fixed amount or percentage you can get for an insurance settlement. The procedure basically entails your claims adjuster to complete the estimate at the time of inspection, proposing to you an amount written on a check. You would want to find an insurance company with a higher rating who can usually issue a higher price for the settlement.
Consider the type of your insurance settlement and the amount before you agree on anything. If you are uncertain of what your next move should be, do not take any action without seeking legal or financial advice. You do not want to make a decision you would regret.
Insurance is a necessity in any business. Businesses cover themselves against losses such as fire, theft and unexpected natural disasters. It is with the bookkeeping or accounting that owners get it wrong.
On successful insurance claims, a payment is normally made to the insured. My experience has led me to believe that small businesses have no clue, as to how, to account for insurance settlements. Most businesses reflect the payment as income.
Not only would this be deceptive but also violates International Accounting Standards. Since the transaction has everything to do with assets and nothing to do with income, it should be adjusted against assets. Erroneous accounting for assets might prejudice the business further in future, if similar insurance claims are made.
Insurance companies settle claims on assets, on its book value and not its costs. (And yet the asset was insured on its cost at date of purchase). Whereas this principle might vary from country to country, book value is widely accepted as the norm. Since most small businesses fail to maintain proper fixed assets registers, insurance companies perform “desk top valuations”, or make an “estimate”, on the book value, mostly much lower than its “real” book value. Without proper records, the claimant cannot debunk the assessor’s final conclusions.
Before I loose you in a sea of confusion, let me elaborate. If an asset is on your books at least, without the asset register, but you have no purchase date, and this asset is lost due to theft, no accurate wear and tear can be furnished. Furthermore, if a claim is settled, and reflects as “income”, what happens to the asset that was stolen, but still reflects on your books?
Many reading this article could not care a hoot about the number crunching involved, but please stay with me for a minute. You might not care, but an investor, a bank and yes, the insurance company might pick this up on your financial statements when they demand your reports.
The method used to account for insurance claims is the “disposal method”. Any asset subject to an insurance claim should be transferred to a “Disposal Account”. Depreciation on the asset for the relevant period is calculated, and credited to the disposal account with the insurance settlement. The cost, less depreciation equals book value. Any settlement amounts over or under book value, will result in a loss or profit on disposal.
An insurance claim, wrongly entered as “income”, can be adjusted by transferring the amount to the disposal account. After effecting these entries, the disposal account should balance to zero. Your new records would reveal, the loss or profit on claim (income statement), settlement in bank account, fixed assets less the stolen/lost asset, and a lower depreciation estimate for the year.
I acknowledge that this is your accountant’s job, you however have a duty to provide accurate records. But how many businesses continue to pay, the same insurance premiums on the assets, since purchase date, when they, entitled to a lower premium, due to a lower asset value.(prior to any asset losses).
Also, a precarious asset situation in your books, might lead to problems in your tax affairs.
No business can afford a visit from the IRS. Did you know that tax authorities always commence auditing, your assets, before they move on to your income?