The primary reason for forming a captive is Risk Management. The Primary benefit is coverage of risks associated with your business directly. There are primary benefits of Captive Insurance, and secondary benefits, all of which are available to the business owners. The level and depth of benefit are plentiful, all while insuring risks of your operating company.
Risk Management – Captive Insurance insures risks currently uninsured, or are informally self-insured. Risks which potentially impact your business substantially.
Asset Protection – Assets of your insurance company, can and should be protected from predators and creditors when properly structured and maintained.
Wealth Accumulation - A Captive Insurance company should be profitable. The assets of the insurance company belong to the owner or owners of the company. Surplus of the company is wealth accumulation.
Cash Flow - The potential savings realized by obtaining cheaper and more relevant types of insurance, combined with higher deductibles of third party coverage may result in significant improvements in your business’s after-tax cash flow.
Increased Coverage & Greater Control over Claims – As the owner of your insurance company, you determine exposures to insure. As the insurance company owner, you have greater control over claims.
Reduced Insurance Costs – Higher deductibles and lower premiums with third party coverage creates increased cash flow to the business owner, with no greater risk.
Create Profit Center - Your insurance company should be profitable. Profitability comes from claims control, asset management, and retained surplus.
Taxation – According to Internal Revenue Code 831(b), Captive insurance companies may be taxed only on their investment income, and do not pay taxes on the premiums they collect, providing premiums to the captive do not exceed $2.8m annually. The PATH Act of 2015 increases the maximum premium amount to $2.8m and indexes this amount for inflation. These provisions are effective for taxable years beginning after December 31, 2016. Further, the captive may retain surplus from underwriting profits free of income tax. Investment income is taxable to the captive insurance company at graduated corporate rates, while dividends paid out of a captive, if any, should be taxed at long-term capital gains rates as a qualifying dividend.
In order to be eligible for the favorable taxation noted above, it is crucial that the captive insurance company conforms with Internal Revenue Code Section 7701(o) regarding economic substance, and be structured and managed as an insurance company, providing true risk, for appropriate premium levels. The Service has frequently stated that an insurance contract must fall within the “commonly accepted sense of insurance” based upon a number of factual determinations. A captive insurance company must be organized and operated for bona fide business purpose and demonstrate both risk shifting and risk distribution in order for the arrangement to meet the requirements to qualify as insurance in the commonly accepted sense.
Superior Exit Strategies - The synergy between a Captive Insurance company and additional financial structures and strategies create exponential strength.
There are multiple benefits of Captive Insurance starting and ending with a complete risk management program. Business owners who own Captive insurance companies are no longer at a disadvantage. A business should be better prepared to survive the unexpected, as well as accumulate wealth to accomplish their financial goals while having a more comprehensive risk management program.