Captive Re-insurance Strategies: Beneficial Deductions for Successful Business Owners

If you are you a successful business owner, physician or professional and have not set up your own Captive Re-insurance Company (Captive) then you are not taking advantage of one of the most beneficial provisions of the U.S. tax code!

An extremely useful but not very well known section of the U.S. tax code (Section 831B) provides the owners of U.S. businesses and professional practices to take deductions for the payment of Captive Re-insurance premiums to their “own” insurance company. These Captive Insurance premiums are for business risks “particular” to the business owner who is writing the premium checks; hence the term “Captive” insurance.

So why would a business owner do this?  Properly structured Captives provide deductions for the premium payment of actual and true risks of the business owner. Subsequently, significant tax efficient underwriting profits can potentially be realized to the owner. Pre-tax wealth can potentially be accumulated depending upon the claims and losses filed against these reserves on a tax-deferred basis. Eventually, the reserves that are not used for future business risks can be distributed as dividends.  As an example: Most clients annually trade off a “gross” cost of approximately 12% versus paying a 35% to 50% tax; this typically yields a tax savings of about $25,000 per $100,000 of annual premium. The underwriting profits ($88,000) less any claims accumulate tax deferred and capital gains (typically) are paid only on the interest earned on these profits. When the underwriting profits are withdrawn, they are taxed at a dividend rate.

A properly structured Captive can bring about multiple benefits including:

Favoable Tax Treatment
Pre-Tax Wealth Accumulation
Asset Protection
Pre-Tax Wealth Transfer Tool for Your Kids
Highly Efficient Estate Planning
Insurance Cost Minimization
Risk Control

Examples of Coverages used in a typical Captive Re-insurance policy:  

Excess Professional Liability Legal / Claim Expense       Change of Regulatory Environment
Disability Expense Reimbursement Protection                Key Supplier Loss Expense Reimbursement
Excess Professional Liability Loss Reimbursement         Key Customer Loss Expense Reimbursement
Key Man Disability Income (Payable to the company)      Product Recall Loss Expense Reimbursement
International Travel Medical Expense Reimbursement      Commercial Plus (Deductibles and Exclusions)
International Travel Disability                                          Terrorist – Business Interruption
International Kidnap/Ransom Investigation Expense         Directors & Officers Liability
Rep and Warranty Policy – Seller/Buyer                         Environmental Legal Defense
Tax Audit Defense Legal Expense Reimbursement          EPLI: Employment Practices Liability Insurance
Cyber Risk                                                                   Computer Loss
Regulatory Investigation Defense Legal Expense Reimbursement

Creating your own insurance company can be a daunting task. Captives can be created domestically or internationally. We assist the business owner to determine the appropriate jurisdiction and subsequently handle every aspect from Captive formation, underwriting, actuarial studies to the on-going maintenance and compliance work; in essence, we turn a fairly complicated process into a simple turn-key one for our clients.

We start with educating the client and advisers as to Captive legislation and then determine if the Captive is applicable to the client’s business; what prospective benefits can be obtained for the owner, his business and/or his estate, etc. We will provide referrals to clients and advisors that we have worked with previously and who will provide a testament to our approach and results. Moving forward, a feasibility study is performed to determine the range of Captive premiums actuarially acceptable and then we implement and maintain. It is also important to note that we use an independent underwriting firm that has been performing Captive actuarial studies since 1987 without a change in audit; while the benefits are extremely advantageous, our work is conservative!

Unlike most Captive formation companies who will state that to be cost effective that a company must justify a minimum Captive premium of $400,000, we have reduced the associated costs so that the smallest premium that must be justified through actuarial studies and underwriting of the parent company’s operations is $100,000 of “aggregated” risk premiums. This provides the opportunity even for the sole proprietor or single physician to potentially benefit from a properly structured Captive.

Exploring a Captive Insurance Company makes sense for almost every successful business owner and potentially could have a profound impact upon your financial future. We would welcome a conversation with business owners or their advisors about how a Captive might integrate into your strategic wealth planning along with the opportunity to prepare an analysis for you to show the financial impact a captive might have. To determine if a Captive is right for you, please go to Contact Us. 

This web site and all of its contents are for educational purposes only. All work is done subject to IRS and U.S. Treasury Department reporting requirements and filings. Treasury Department Circular 230 Disclosure: Neither Resurgens Advisory Group, LLC nor anyone associated with Resurgens Advisory Group, LLC, collectively or separately provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. In order to comply with Internal Revenue Service Circular 230 (if applicable), you are notified that any discussion of U.S. federal tax issues contained or referred to herein is not intended or written to be used, and cannot be used, for the purpose of:  (A) avoiding penalties that may be imposed under the Internal Revenue Code; nor (B) promoting, marketing or recommending to another party any transaction or matter addressed herein.