The benefits of captive insurance are powerful, providing both comprehensive risk coverage and financial efficiency for businesses.
A “captive” is an insurance company that’s been specifically formed to insure the risks of an affiliated business. Put simply, a business owner can form his or her own insurance company to insure their business risks. Captives offer custom-built insurance coverages, designed to fund the specific losses of a business or groups of businesses and fill gaps in commercial policies. Captives should be used as a supplement to existing commercial coverages—not a replacement of them.
Under Section 831(b) of the Internal Revenue Code, captive insurance tax benefits may be available. These financial benefits should always come second to the risk mitigation needs of the company, as stipulated by governmental and regulatory rules.
831(b) captive financial benefits may include:
• Dividends
• Secured loans from the captive business to the operating company
• 0% Federal income tax paid on the captive’s underwriting profits
Large, commercial insurance companies have a profit motive. Business owners can be denied, and approved claims can take weeks or months to process. Captive insurance companies allow business owners to have control over the claims process, eliminating the chance of a denial. Business owners also eliminate the chance of fraud because it is impossible to be fraudulent against yourself.
Overall, the benefits of captive insurance are far-reaching and provide sustainable risk coverage for businesses with uninsured risks.
Benefits of a Captive Insurance Company : Risk Funding
Businesses in industries such as construction, manufacturing, healthcare, and others, can write coverages with a captive insurance company that are otherwise too expensive or unavailable in the conventional marketplace.
Policies written through a captive insurance company may include coverage for cyber-attacks, equipment failure, legal expense reimbursement, pollution liability, and a lot more. Coverages can offset both business risks, such as employer liability, and operational risks, such as business interruption. Overall, the risk funding benefits of a captive insurance company are significant.
To determine what true risks exist inside your business, and realize the full advantages of captive insurance, from a risk funding perspective, an objective, on-site feasibility study should be conducted. This is an objective assessment of uninsured risks found inside your business; a process that is best handled by seasoned professionals in the captive area.
Captive Insurance Tax Benefits
Captives are highly regulated, and are required to operate as bona fide insurance companies. Therefore, acceptable uninsured risks must be present before a captive insurance company can be formed.
Once the captive is operational, with coverages designed to fit the insurance needs of the business, the captive owner or “insured” may be eligible for captive insurance tax advantages (namely with captives formed under IRC 831(b)).
For example, $1,000,000 in earned profits are subject to a tax margin of at least 45%, and in some states, over 50%. This means, by not using a captive, at least 45% (or $450,000) is taxable, leaving you with a retainer of $550,000.
With a captive you can retain the full $1,000,000. The monies are kept in the captive to cover unexpected losses. And if those losses don’t come to fruition, you can retain these funds as investment income.
Captive insurance tax benefits under IRC 831(b) have been a proven strategy for improving cash flow for many mid-market businesses. It has allowed business owners in the middle market to play on a more level playing field with large insurers.
Ultimately, the financial benefits to captive and alternative risk planning promotes growth, sustainability, and resilience.
Working with Capstone Associated Services, Ltd.
Capstone Associated Services, Ltd. is one of the oldest and largest sponsors of captive insurance companies which, under IRC 831(b), underwrite property & casualty annual premiums of less than CURRENT_PREMIUM_CAP million per year.
Capstone has experience forming many different types of captives.
Capstone provides the most comprehensive captive insurance planning available. Capstone's staff includes CPCUs (Chartered Property & Casualty Underwriters), accountants and administrators.
Capstone is a captive insurance planning firm, offering captive insurance management services, captive asset management, and accounting for one turnkey fee. These services allow businesses to realize the full benefits of captive insurance.
Having formed over 200 captives over the past 26 years, we understand the importance of excellence in captive planning.
There are many requirements for a captive insurance program to be treated as a bona fide insurance arrangement. Proper planning and advisory expertise are essential.
Contact us to learn more about how captive insurance can benefit your mid-market organization. Call 713.800.0550, or submit your information via the form.
