A captive is an insurance company owned by a business or a business owner, which insures the risks of that business. Originally, the shield of only the very largest companies, captives are no longer the exclusive tool of those in the Fortune 500. In fact, there are thousands of captives writing over $50 billion in annual premiums. Many of these captives insure middle market companies and successful professionals.

Captives are well suited for:

  • Segregating ownership of assets
  • Funding an estate
  • Protect hard-earned assets from seizure
  • Provide comfort that one’s assets are secure

Possible Uses:

Example: An individual who owns a very successful privately held company who has heirs seeking a tax-advantaged structure for passing ownership and/or profits from the founding generation to the next generation.

A trust can be formed for the benefit of the heirs, and the trust can own the captive. The captive could also purchase a life insurance policy on the life of the founder. The life policy could own the captive. The variations depend on the goals of the founder and the skills of the consultant.

2017 – Year of the Captive! The current $1.2 million limit on premiums will increase to $2.2 million in 2017

Congress passed its 2015 Appropriation Bill, which includes the first significant changes to Internal Revenue Code section 831(b) in nearly 30 years. Section 831(b) presently allows an insurance company that takes in $1.2 million or less in premiums to make an election so that it is not taxed on its premium income. To obtain this benefit, the company instead gives up the ability to fully take some deductions to which non-831(b) companies would entitled.

Insure Hidden Risk
Captive Presentation

Most businesses unknowingly self-insure a large amount of risk. Many of these are hidden or “below the surface” risks inherent in the operation of a business. With a captive, self-insured risks can be converted into tax-deductible premiums that are paid to a captive. Any materialized risks can now be paid with pre-tax assets. If insurance claims are as projected, the captive will retain substantial profits that can be distributed to its owners.

Insured Risk

  • Auto
  • General Liability
  • Medical Malpractice
  • Property
  • Worker’s Compensation

Self-Insured Risk

  • A/R Concentration
  • Business Interruption
  • Construction Defect
  • Cyber Risk
  • D&O/ E&O
  • Disability
  • Earthquake/Hurricane

More Self-Insured Risk

  • Employment Practices
  • Intellectual Property Risks
  • IT and Information Security Risks
  • Litigation Defense
  • Mold and Pollution
  • Natural Disasters
  • Product Warranty

When effectively designed and managed captive insurance companies achieve these goals and objectives:

Business Goals of Captive Insurance Programs:

  • Improve cash flow predictability and balances
  • Retain control over risk assets
  • Improve risk coverage and cover uncovered risks
  • Reduce risk financing cost and lower premiums
  • Create new profit center
  • Minimize taxes
  • Increase asset portfolio liquidity

Business objectives of Captive Insurance Programs:

  • Reduce insurance costs
  • Improve Claim Reserve Investment Management
  • Increase tax saving opportunities
  • Protect assets
  • Reduce asset transfer costs
  • Expand wealth accumulation options