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Captive Insurance – does it fit in your strategy?

By September 24, 2014Business, Tax Strategy, Taxes

By Guest Blogger Bo Brower

What is a captive insurance company and how can a small business take advantage of a captive?

A captive is an insurance company established to insure the specialized risks of an affiliated business entity.  It issues policies, collects premiums and pays claims.

A captive can be owned by one or more business owners and can be a financially efficient tool in managing risk.  Businesses typically have a number of risks that fall outside of the underwriting guidelines of traditional insurance and these specialized risks may be insured through utilizing a captive structure to finance potential losses in a formal structure.

A captive must be formed as a C-Corp and can be domiciled in the U.S. or offshore.  There are several ways to form a captive insurance company, including but not limited to:  single parent captives, group captives, pure captives, self-contained protected Cells, risk-retention groups and producer-owned reinsurance companies.

The purpose of a captive is to insure risk that is currently being self-insured against by a business.  Some examples of these risks may include deductibles, limitations of existing insurance policies, certain types of coverage that are unavailable through the commercial market, or difficult to obtain like deductible reimbursement, cyber risk, director and officers liability, litigation expense, or loss of key customers and suppliers, etc.  A captive allows a business owner to have greater control in managing risk, controlling premiums and paying claims.

Tax Considerations

The risk management benefits of a captive are primary but there are also some key tax advantages as well.  The 831(b) election provided by Congress permits a captive to receive up to $1.2 million per year in insurance premiums tax free. This means that the business paying the premiums can deduct up to $1.2 million per year for insurance costs, but that amount is not taxable to the captive.  All investment income in the 831(b) captive is taxed at normal corporate rates (which start at 15%). When a captive is liquidated, its owners will pay tax on the gain at favorable long-term capital gains rates.

Who should form a captive?

A captive should be formed by those who carry above-average risk and have a long-term horizon for proper development and implementation of a captive.  A captive can be a good solution for businesses in diverse industries.  Some of the key industries that should consider a captive are physician groups, manufacturers, exporters and importers, construction-related professionals, oil and gas companies, commercial property owners, and transportation companies and dealerships.

Good candidates for an 831(b) captive will generally meet one or more of the following criteria:

  • Substantial Self-insured/Uninsured

Business Risk

  • 20+ Employees
  • $10m-$15m+ Gross Revenue
  • Pre-tax Profits of at Least $1.5m

Bo L. Brower is the President and Founding Member of Corprotect-Synergy, LLC. With over 15 years of experience in financial and personal consultation he has helped hundreds of clients position themselves and their posterity to have a better future. If you feel like you are a fit, or have more detailed questions regarding your specific situation, let’s get together.

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