A captive insurance company enables a business owner to reduce taxes, build wealth and improve insurance protection. A captive insurance company is similar in many ways to any other insurance company. It is referred to as “captive” because it provides insurance to one or more operating businesses in the same “economic family”.
Two key tax benefits enable a structure containing a captive insurance company to build wealth efficiently: (1) insurance premium payments from a business to the captive insurance company are tax deductible; and (2) under IRC section 831(b), a captive insurance company can receive up to $1.2 million of premium payments annually income-tax-free. In other words, so long as insurance purchased from the captive is reasonable and genuine, a business owner can shift up to $1.2 million of business revenues in the form of deductible insurance premiums out of an operating business into the low-tax captive insurance company. An 831(b) captive insurance company pays taxes only on income from its investments.
In addition to tax benefits, principal advantages of a captive insurance company include increased control and increased flexibility, which improve insurance protection and lower costs. As a practical matter, a captive insurance company makes economic sense when the economic family has annual business revenues of $2.5 million or more. A captive’s direct access to reinsurance increases efficiency. A captive insurance company typically participates in a reinsurance pool to diversify risk. A group of businesses or professionals having similar or homogeneous risks can form a multiple-parent captive (or group captive) insurance company and/or join a risk retention group (RRG) to pool resources and risks.
“Turnkey” solutions are available for conducting an initial evaluation, actuarial studies, licensing, and ongoing management of a captive insurance company. The annual cost for such turnkey services is typically about $50,000 to $150,000, which is high but readily offset by the tax reduction and investment growth enabled by a captive insurance company.
For more details, click on the article “Captive Insurance Company” listed on the ARTICLES page of this website, or contact this office (see CONTACT page).
