The annual cost for such turnkey services is typically about $40,000 to $150,000, which is high but readily offset through lower insurance costs and the potential tax savings and investment growth enabled by a captive insurance company.įor more details, contact this office for a free consultation, tel. “Turnkey” solutions are available for conducting an initial evaluation, actuarial studies, licensing, and ongoing management of a captive insurance company. 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.
A captive insurance company typically participates in a reinsurance pool to diversify risk. A captive’s direct access to reinsurance increases efficiency. 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. Principal advantages of a captive insurance company include increased control and increased flexibility, which improve insurance protection and lower costs, in addition to tax benefits. An owner of a CIC typically accesses wealth accumulated in the CIC either through a dividend from the CIC, which is taxed as a qualified dividend at long-term capital gains rates, or as a capital gain upon liquidation of the CIC.Īs a side benefit, when insurance premium payments by a business to a CIC result in lowering the owner’s income tax bracket beneath threshold levels, the owner also pays less tax on income and capital gains. The CIC can use the Dividends Received Deduction for dividends paid to it from investments in corporation stock.
In other words, so long as insurance purchased from the captive is reasonable and genuine, a business owner can shift up to $2.2 million of business revenues in the form of deductible insurance premiums out of an operating business into the low-tax captive insurance company.Īn 831(b) captive insurance company pays taxes only on income from its investments. Two key tax benefits enable a structure containing a captive insurance company to provide insurance 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 $2.2 million of premium payments annually income-tax-free. In contrast, a CIC can provide affordable insurance for otherwise uninsured risks, as well as build reserve funds using pretax dollars. Pass-through businesses (sole proprietors, LLCs and S-Corps) can build a “rainy-day” reserve fund for uninsured risk only with after-tax dollars. Insurance for some business risks is often not available from conventional insurers or is simply too expensive. A CIC reduces overhead and keeps profits “in the family”. Typically, 30 to 50 percent of premium amounts paid for conventional commercially-available insurance policies are used for the insurer’s overhead and profits. It is referred to as “captive” because it provides insurance to one or more operating businesses in the same “economic family”. A captive insurance company is similar in many ways to any other insurance company. With a captive insurance company (CIC), a business owner can improve insurance protection, lower costs, reduce taxes, and build and protect wealth.
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