Captive Insurance Companies
For educational and informational purposes only, This is not a recommendation to buy, sell or invest. Please consult your advisor and tax consultant.
A “captive insurer” is defined as an insurance company that is maintained and controlled by its insureds. Captive Insurance Companies are privately owned companies that insure only the risks its owner desires to accept while insuring additional risks via commercial guarantors. A Captive delivers an opportunity for a company or its owners to preserve income that may otherwise be grossed by third-party insurance. Captive premiums paid by the financier are 100% deductible.
Understanding Captive Benefits
The benefits can be challenging to understand and explain, leaving Captive Insurance Companies, more often than not, overlooked as a strategic ingenuity by financial professionals. However, with careful guidance through the foggy challenges, the benefits and economic value of a Captive program become quite clear and easy to grasp. These benefits include:
Ownership and Control
- The corporate owner is in thorough control of the Captive and will oversee its investment and bank accounts.
- A Captive allows its organization to frequently review its potentials and choose the amount of economic risks to transfer to the reinsurance markets and those to preserve within its Captive.
- Captive owners receive a large tax deduction for paid premiums.
- A certain amount of yearly premiums are income tax-free per 831(b) of the Internal Revenue Service (IRS) Code.
- Premiums paid to the Captive are completely deductible by the payer as “ordinary and reasonable business expenses,” under the Internal Revenue Code (IRC) Section 162(a).
- Insurance for risks rarely covered by traditional policies (such as product recall) can be obtained by the business.
- Coverage can be tailored to obtain access to insurance markets that have the capacity and readiness to handle nontraditional risks.
Enhanced Cash Flow
Compared to conventional commercial guarantors, a Captive provides greater affordability and permanency on a large range of commercial coverages.
- A Captive is less susceptible to fluctuating pricing cycles which allows its owner to sustain accurate economic forecasts.
- Profits commonly earned by outside insurance companies can be retained by the Captive’s owners.
A company must understand how a Captive will fit into the business’ economics and planning. This starts with an analysis of client data and a comprehensive overview of the expenses and benefits of the Captive. A captive Feasibility Study will define the accepted level of claims for the business, revealing trends and reference points for payments, expenses, and reinsurance.
A Captive Insurance Company permits its owner to more efficiently manage business risk. When planned appropriately, the Captive will deliver extensive tax savings, control over financial accounts, flexible coverage, enhanced cash flow and reduced costs allowing the business a tailored coverage that works for their specific needs.