Instead of self-insuring, a business owner can form a small insurance company (called a Captive Insurance Company or Captive (CIC) for short). Captives convert exposed business-specific self-insured risks (such as: business-interruption coverage, cyber risk, etc …) into Property and Casualty (P&C) premiums. These premiums are tax-deductible to the business, tax-exempt to the insurance company, and excess premiums and/or profits can be distributed to the captive’s owners.
As far as size, what’s the general rule of thumb for a company looking into a Captive?
Typically, the company will have pre-tax profits (before partners’ salary, bonus, and other compensation) of at least $1 million.
What are some of the benefits of a Captive?
Protects against risks not covered in typical insurance plans
Business can control risks and claims
Reduces total insurance costs
Wealth Building & Estate Planning
Supported by IRS Codes
Is it difficult to establish a Captive?
Yes and no. There are many IRS Guidelines, Capital Requirements, and State Insurance Rules in forming a Captive. An offshore Captive has additional legal and tax requirements. It’s essential to utilize a competent tax attorney, Captive implementation firm, and a qualified Third Party Administrator. As a general rule of thumb, a Captive Insurance Company must always be set up with a legitimate insurance purpose.
What’s the cost to establish a Captive?
Fees vary depending upon the complexity, required due diligence, legal requirements, and needed capital contribution. Typically, a company conducts an initial feasibility study to determine unprotected risks and if a Captive would be a worthwhile fit.
What Can a Captive Insure?
Captives have broad leeway as to what they can insure as long as there’s a legitimate insurance purpose. Typically, a Captive works best with P&C-type risks that are not covered in traditional policies. Here’s a sample of some risks a Captive could protect against.
Please contact us to discuss your specific needs and how a Captive might work for you.
*Please note, all concepts, strategies, and products mentioned may not be suitable for you or your company. Information provided is not intended to be legal or tax advice. Please consult with your tax and legal advisor for specific tax questions.