Whether you’re an entrepreneur searching for ways to reduce risk associated with a venture, or you’re a professional curious about novel ways to protect your family and build equity, captive insurance might be a useful solution to explore.
This exciting approach to insurance (yes, there can be such a thing) can help with both risk mitigation and economic, tax and estate planning… as long as you comply with what can be complex state regulations and IRS rules.
Here’s how it works and what you need to know. A “captive,” as it’s known, is a risk management structure. It is, in every sense, your very own insurance company. It’s almost like you’ve “captured” an insurance company. When you pay premiums to a traditional carrier, you effectively waste that money if you don’t make a claim. With a captive, however, your premiums accrue as equity, and you can also deduct these premiums as a business expense for your company or practice. The Internal Revenue Code provides that the first $1,200,000 of income paid to your captive company is not taxable income to the captive company. This benefit can be compelling. But captives do more than manage risk; they can also preserve wealth, help you transfer money to beneficiaries (or trusts created for beneficiaries) and protect assets on a tax advantaged basis.
How do you get equity out? Depending on the structure of the captive, you can distribute money as dividends at qualified dividend rates. Even more intriguingly, a captive can protect you against risks that traditional insurance can’t cover, either because such coverage would be unavailable or because it would be far too expensive.
Diverse types of captives are available. There are several types of captive insurance companies. They include single parent captives, risk retention group captives, rental captives, agency captive insurers and more. Determining which captive is right for you (if any) and how to structure and manage it will depend on your planning needs and the nature of risks that you face. Regulatory compliance factors, financial issues and your business’s infrastructure also can come into play.
Captives are particularly well suited for family owned businesses and professionals. Ownership of a captive can include individuals, corporations, LLCs, partnerships, family members and trusts.
Many elements must be in place to establish and maintain a captive. For instance, on your application, you will need to include (among other things) a plan of operation, a licensing application, an actuarial analysis, a charter and bylaws, and beyond. To manage a captive, you must deal with underwriting, claims, compliance reporting and financial requirements. An unsound approach that does not meet critical IRS provisions or engages in dubious practices can lead to an audit by the IRS. In fact, the IRS has recently been subjecting captives to increased scrutiny. Your approach must be mindful of the shifting regulatory landscape. The key is to make sure that the premiums your business pays to your captive company are actuarially reasonable. All of these issues can be managed by working with a competent captive insurance manager. Our team can help you explore whether captive insurance might be a smart way to reduce your risk, build equity and protect the next generation. Please call us at (800) 827-7784 for a free consultation.