Captive Insurance Company

Captive Insurance Companies Defined

What is a captive insurance company?

A captive insurance company is an insurer formed to provide coverage for its related businesses or parent company. The policies may either supplement or replace existing conventional policies. Often the captive insurance company is best used for difficult, industry specific coverage not readily available in the conventional markets. Under Section 831(b) of the Internal Revenue Code where annual written premiums are less than CURRENT_PREMIUM_CAP million a year, the underwriting profits of the insurer are tax exempt for federal income tax purposes. Over the years, IRS tax guidance and numerous court rulings have established the parameters wherein tax compliant captives operate.

Benefits of Forming a Captive Insurance Company

A captive insurance company provides a number of benefits for a business, including :

Insure Hidden Risks

Most business owners unknowingly self-insure a large amount of risk. With a captive, self-insured, under-insured and un-insured risks can be converted into tax-deductible premiums that are paid to your captive.

Reduce Costs, Capture Underwriting Profit

Typically, a large percentage of premiums paid to a commercial insurer goes to litigation costs, marketing, overhead and profit. By supplementing or replacing a portion of conventional coverages, a captive can cost effectively mitigate risks.

Wealth Accumulation and Asset Protection

Captives are one of the better asset protection tools available. Designed correctly, assets in a captive are difficult for the operating company’s creditors to reach. Captives also provide significant estate planning benefits.

There are wide ranging benefits associated with owning your own regulated financial institution which can loan money and make investments with its own capital.

Planning Opportunities with a Captive Insurance Company

  1. Insurance Reserves: Protect the business through customized insurance policies against otherwise uninsured or under insured exposures or exposures for which conventional policies are not readily available.
  2. Deferred Comp: Compensate key executives and avoid ERISA issues through their ownership of the captive, incentivizing key employees to implement loss mitigation.
  3. Life Insurance: Use pretax dollars in the captive to purchase life insurance as one of a diversified pool of investments.
  4. Buy Out Partners: Buy out partners using captive assets.
  5. Finance Purchases: Use the captive’s assets to make or finance investments.

Optimal Candidates for a Captive Insurance Company

  1. Business clients with a significant operating business or professional risk, with a minimum of $1 million/year in taxable income should consider this planning.
  2. Physician groups.
  3. Other professional groups such as engineering, law and accounting firms.
  4. Real estate developers, home builders, and contractors.

Download a pdf copy Captive Insurance Explained in Plain English for simple explanations of captive-related concepts.

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