The amount we spend on car insurance rises steadily from one year to the next. The reason for this, among other things, is an increasing number of claims.
When a claim succeeds, the amount that the insurance company has to pay to the claimant is called a settlement. Car insurance settlements can be considerable, depending on the nature of the accident.
So are insurance settlements taxable? This is something that many claimants are anxious to know, as tax could greatly reduce the value of their claim.
Read on to learn more about car insurance settlements, including the tax liability they imply.
Table of Contents
- How Do Car Insurance Settlements Work?
- What Does a Car Insurance Settlement Cover?
- Are Insurance Settlements Taxable?
- What to Do After a Car Accident
- Recovering Physically & Financially After an Accident
How Do Car Insurance Settlements Work?
Insurance provides compensation to policyholders following a given event. Car insurance provides this compensation in the event of an accident, if your car catches fire or is damaged in another way, or if someone steals your car.
The first of these is the most important consideration when it comes to car insurance claims. Car accidents are relatively common, and can be serious in many cases.
If you’re involved in an accident with another driver and it was their fault, their insurance company should compensate you for any damage you suffer. This means that your own insurance history will be unaffected.
What Does a Car Insurance Settlement Cover?
The coverage you’re entitled to will depend on what you pay for on your premium. There are different levels of insurance available.
Insurance laws vary from one state to the next. Unless you live in New Hampshire, however, you will always be legally required to have some kind of insurance on a car that you drive on public streets.
The following are some of the key types of auto insurance you should know about.
This is the minimum level of coverage that many states require. It covers any injury to another person, or damage to another’s property, that you cause while driving. It does not offer coverage for damage you suffer yourself.
Uninsured & Underinsured Motorist Coverage
If another driver collides with you and the fault was not yours, they are liable for your expenses. However, if they’re not insured, you may not have any way of recovering this money.
This type of insurance covers you in that scenario.
This covers any damage to your car resulting from a collision. It does not cover damage to other parties, nor injuries suffered by you or anyone else.
Personal Injury Coverage
This kind of coverage varies from one provider to the next. It may cover the medical expenses associated with injuries you suffer in a car accident, and it may also compensate you for lost earnings resulting from these injuries.
This is similar to personal injury coverage, but relates only to medical expenses you incur from a car accident. However, it may also cover the medical expenses of other people in the car with you when you crash.
This type of insurance is like the other five rolled into one. It is usually quite expensive, but will protect you against all types of risk associated with owning and driving a car.
Are Insurance Settlements Taxable?
The answer to this question isn’t the same for everyone. However, in most cases, your car insurance settlement will not be affected by taxes.
The IRS taxes any money you get which it views as income. Insurance settlements generally do not fit this classification.
Income is a personal financial gain. Most of the money that you receive from an insurance settlement goes towards restoring your position before you suffered an accident. This might be, for example, medical bills or repairs to your car.
Because these things only get you back to where you were before the accident, they do not constitute a personal gain in the eyes of the tax authorities.
However, any payments you receive for lost wages will be taxable. The logic here is that your wages, had you earned them, would have been taxable. Therefore, your tax liability should be the same in respect of lost earnings coverage.
What to Do After a Car Accident
If you’ve been in a car accident, there are a number of steps you should take in its immediate aftermath.
Firstly, if the collision was at all serious, you need to see a medical professional. Even if you feel fine and don’t have symptoms of any illness or injury, this is still something you need to do.
This is because many serious conditions can result from a car accident without becoming apparent right away. Head trauma, for example, can go unnoticed for a considerable period, after which it might be more difficult to treat effectively.
Once you’re sure your health isn’t at risk, the next step is to look after yourself financially. This is sometimes a simple matter of filing a claim with your insurance company. In other cases, however, this process can get very complex.
If there is some suggestion that you are ineligible for compensation for some reason, your car insurance company might refuse to pay. To address this situation, you may have to go to court.
If this happens, you should hire a good car accident lawyer as soon as possible.
Recovering Physically & Financially After an Accident
A car accident might be one of the most traumatic experiences of your life. The physical pain and loss of mobility you endure are bad enough by themselves, and financial woes can compound your problems hugely.
However, taxation isn’t usually something that will be a problem. The question on your mind should be “will my insurance settlement cover my needs?” rather than “are insurance settlements taxable?”
Did you find this article informative? If so, you should know that we have plenty of other content just like it. Have a browse through our site for more useful posts about the world of motoring.