What is a Captive Insurance Company?
A Captive Insurance Company (a “Captive” or “CIC”) is a limited purpose, licensed insurance company – formed by a business owner for the express purpose of insuring his/her risks inherent to their business. It is an organized plan of self-insurance that calculates risks, issues policies, collects premiums, pays expenses and establishes reserves to pay future claims.
Advantages of a Captive
Businesses form Captives:
• To insure uninsured risks not covered in the commercial marketplace
• Reduce the total cost of insurance
• Control coverage and claims
• Recapture underwriting profits and investment income
• Cash flow smoothing
• Tax benefits
• Wealth accumulation and preservation
• Asset protection
What Types of Risks are Insured by Captives?
One of the prevalent strategies employed by business owners is to purchase insurance for catastrophic risks from the commercial marketplace and use the Captive for lower severity risks such as:
• Directors & Officers Liability Antitrust & Unfair Competition
• Errors & Omissions Credit Default/A Receivable
• Employment Practices Knock-Off Lost Profit
• Lender Failure Machinery Breakdown
• Weather Risks Advertising & Marketing Failure
• Copyright, Trademark, Patent Infringement
• Antitrust & Unfair Competition
• Lawsuit Interruption/Legal Expenses
• Credit Default/A Receivable
• Knock-Off Lost Profit
• Machinery Breakdown
• Advertising & Marketing Failure
Who is the Ideal Candidate for a Captive?
• Profitable businesses seeking substantial annual adjustable tax deductions.
• Businesses with $500,000 or more in sustainable operating profits.
• Businesses with multiple entities or those that can create multiple operating subsidiaries or affiliates.
• Businesses with requisite risk currently uninsured or underinsured.
• Business owners interested in personal wealth accumulation, family wealth transfer strategies, and/or are looking for asset protection.
When properly structured and as long as the Captive receives less than $1.2M in premiums each year, the Captive is taxed on the investment income only (0% on the premium income). This tax exemption is provided by the federal government to encourage small and mid-sized businesses to form Captives.
Additionally, premiums paid by the business to the Captive are treated as an “ordinary and necessary” business expense; therefore it is fully tax deductible by the business.
Captive insurance company could provide the following tax and non-tax benefits:
• Opportunity to accumulate wealth in a tax-favored vehicle.
• Distributions to captive owners at favorable income tax rates.
• Asset protection from the claims of business and personal creditors
• Reduction in the insurance premiums presently paid by the operating company to other insurance companies.
• Insuring risks that would otherwise be uninsurable.
How Long Have Captives Been Around?
Captives have been around for nearly 60 years, they have predominantly been the domain of Fortune 500 companies and domiciled mostly in offshore jurisdictions. In 2001 and 2002 the IRS issued several Revenue Rulings that clarified its position on Captives, sparking competition in the marketplace.
How Does it Work?
The Captive owner(s) control the company and how funds are invested and claims are paid. You will work with our team of Captive insurance experts to set up and maintain the insurance company. Accounts are established in the name of the Captive owner giving him/her complete control of the money. However, day-to-day operations of the insurance company are delegated to the Captive management company (although the management company does not have access to the assets of the company). The insurance company assets are located at a banking institution and the surplus and reserves can be invested in a brokerage account located wherever you prefer as authorized by the domicile’s regulatory regime. KRD would perform the annual audit and tax return preparation.
Does it Protect My Assets?
Perhaps there is no better place to hold your assets than inside a Captive insurance company. Insurance company assets mainly consist of legal reserves held for the benefit of policy holders, and thus are simply not available to creditors under any circumstances.
Our team provides a no-obligation, confidential Captive analysis with some basic information from you to determine if you are a viable Captive candidate. We discuss the process, the team members and fees associated with forming and maintaining a Captive insurance company.
For additional information, please contact KRD today at 847-240-1040 or fill out our online contact form.