Advantages of Captive Insurance:
- Coverage tailored to meet your needs
- Reduced operating costs
- Improved cash flow
- Increased coverage and capacity
- Investment income to fund losses
- Funding and underwriting flexibility
- Greater control over claims
- Smaller deductibles for operating units
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Owning a Captive can minimize these exclusions, since they are a variety of risks that are generally not offered in the conventional insurance market.
An individual, company or trust sets up and forms an insurance company. Once licensed, the Captive functions just as most insurance companies do. It can sell insurance coverage (but generally such sales are only to its owners), receive premium dollars and invest them to pay claims and, when needed, approach the reinsurance market to purchase reinsurance to cover losses.
If the insurance claims are low, the Captive will, over time, accumulate significant money. Depending on the structure of the Captive, the income will be taxed in various ways during the wealth accumulation phase (as well as the payout phase) to the Captive owner.
IS CAPTIVE INSURANCE RIGHT FOR YOUR BUSINESS?
This is achieved through designing proper coverage limits, elimination or reduction of broker commissions and lower administrative costs.
Insurers rely on investment and underwriting profit to generate cash flow. Premiums are typically paid in advance while claims are paid out over a longer period of time. By utilizing a Captive, premiums and investment income are retained within the Captive. The Captive can also provide a more flexible premium payment plan thereby offering a direct cash flow advantage to the parent.
A Captive can access the reinsurance market which operates on a lower cost structure that a direct insurer.
A Captive can design the coverages that apply to the specific needs of the company and structure the policy accordingly.
Captives can provide coverage for risks not available or that are too expensive to obtain in the traditional marketplace.
Insurance companies are provided a special tax treatment. They can accrue tax deductible reserves for unpaid claims, whether known or estimated. The cash reserves inside of the Captive are invested.
If your company pays insurance premiums to the Captive insurance company, it is generally tax deductible for your business – but the receipt of premium income is tax free to the Captive. If the claims against the insurance company are managed properly, the reserves will accumulate much quicker and there will be a more profitable company. More profits, in turn, could result in greater gain for the shareholder. At the time of retirement, you can sell your share of stock in the insurance company, receive such increased value as a long-term capital gain. Currently, long term capital gains are taxed at a maximum federal rate of 20%.