Captive insurance companies are becoming more widespread in business today.  We see captives being used to save businesses money by reducing premiums, they have been used in asset protection plans, and they have been used as tax shelters.  Just what is a captive insurance company?

In its essence and simplest form, a captive insurance company is a wholly owned subsidiary of a parent company.  The parent company pays premium to the captive that would otherwise have been paid to an outside insurance company.  The captive then covers the claims made against the parent company.  This is the self-insured use of the captive that large companies have used for many years.  Most major companies and universities have formed their own captive.  Today, captives can be much more diverse and do not have to be owned by one parent company.

When used as insurance, the idea is that the parent company benefits from the good performance of the company rather than the outside insurance company.  If the premium is $10,000, for example, and there is $5,000 in claims in a given year, the company will have a $5,000 surplus.  If, on the other hand, there is $15,000 in claims paid on that same premium there would be a $5,000 loss.  For this reason, most captives will purchase reinsurance or excess insurance to cover claims in excess of a certain amount.  Alternatively, some captives have reserves that have grown large enough over the years that they can absorb such losses.

In 2002, the IRS issued guidance on how to establish a captive in compliance with the tax code.  This allowed many smaller companies to save money by establishing captives.  For instance many companies have formed captives to administer their health insurance.  This has also opened the door for other legitimate uses by smaller companies.  In addition, several companies and/or individuals can get together and form a captive of their own.

When marketed as an investment vehicle or asset protection device, the fact that a captive can potentially reduce income taxes and be transferred estate tax free to heirs are strong selling points.  However, the idea behind the captive is not to use it solely as an investment or asset protection vehicle.  My firm can assist you to form a captives for companies to insure against potential risks.  The IRS does look for abuses such as a captive that insures for a risk that the parent company does not have.

If you are considering a captive you will want to consider how it will be established and run.  You should have an attorney, CPA, and actuary who are familiar with the process during the formation.  There are companies that, for a fee, will administer the insurance program for you.  You must be prepared to handle claims and comply with insurance regulations, so having an experienced administrator is important.  There are also companies that will adjust your claims and handle the entire claims process.  No company should do this on their own.

Additionally, when considering a captive you need to determine which risks you wish to insure.  You may only want to cover health insurance or maybe worker’s compensation.  Also, a benefit of a captive is that you may be able to insure more than traditional insurance would insure if you choose to do so.  Many traditional insurance policies have exclusions that prevent a recovery and you do not have to write those into your own policy.  Waiting periods and caps can be changed to suit your preference and potentially cover your true business loss.

There is a strong potential for abuse through misuse of a captive.  They are subject to audit but the IRS does not audit a large percentage of the captives that currently exist. However, that may change as the IRS continues to look closer at captives.  Therefore, it is important that the company be set up and administered properly.

If you have any questions about captives please contact me at jmcguire@c-wlaw.com.

 


Comments

01/09/2015 00:54

Well this is really a informative post and I am glad to read such a great post, i am going to read all of your posts. Great article thanks.

Reply

This post is so cool and i am surprised

Reply
11/29/2015 03:13

What is a captive insurance company. The primacy of the insurance has been increasing and expanding with every month and week of the passing time. The humans are feeling more and more secure with this process and progression.

Reply
12/08/2015 01:55

i glad after to watch and read your post

Reply

This post is amazing, thank you

Reply
02/29/2016 22:33

you as a site owner should be grateful, as seen from the many comments means every article you post is not in vain

Reply
03/17/2016 05:32

very helpful once the above information thanks a lot

Reply
08/11/2016 21:35

Thanks for sharing your good post gafas ray ban aviator I read Your Article its worth reading.

Reply

From all the articles or news you've ever found on the websites on the internet, only this time I read an article that can make me clap (applause). Good luck all.

Reply

If you are stuck with your task and are not sure how to deal with it, turn to our professional thesis writing help!

Reply
03/05/2017 23:36

Just by surfing through blogs / sites, we can explore the wide world. Keep spirit to all bloggers.

Reply
03/06/2017 01:43

Hello sir admin, I introduce visitors from another planet. Greetings and thank you already shared some interesting information.

Reply
05/03/2017 07:10

Trendy doctor is provides medical tips.Medical tips are natural medical tips, health natural care, natural health care, natural health care tips, tradition medical tips, Traditional medical advice, paarambariya maruthuvam tips, Ayurveda medical tips, siddha maruthuvam tips,

Reply

I really appreciate this blog to has such kind of insurance and incomtax filling knowledge.

Reply

I'm really inspired with your writing abilities and also with the layout in your weblog. Is that this a paid subject or did you customize it yourself? Either way keep up the excellent quality writing, it is uncommon to peer a nice blog like this one nowadays.

Reply

Great information on your site here. I love this post because we can get some useful information from your blog. I expect more post from you guys.

Reply
07/29/2017 06:59

Wha! This is great full blog i like this type blog. Deferentially this blog have this quality big cost, special effects, thank for sharing this blog.

Reply

I know right, Captive insurance companies are becoming more widespread in business today. I have no idea what is giving them this much protocol and coverage. Well either way these companies are doing a terrific work.

Reply

Nice article you have here. I deal with insurance as well. For a greater understanding pertaining to this, you can see my website

Reply
08/09/2017 12:46

Buying life insurance is so very important. It is an integral fundamental in any sound financial plan. The type and amount of coverage you select will depend on why you need to buy your policy.

Reply



Leave a Reply