Captive Insurance

The Captive Insurance Company Act (CIC) is an insurance and tax planning solution that provides small to medium-sized businesses and their owners with significant benefits.

Chief among these is a tax deduction of up to $1,200,000 per year, which is allowed by the IRS using property and casualty insurance premiums. This can result in a benefit to the business of up to $500,000 per year.

Certain jurisdictions in the Caribbean region are the most flexible captive insurance jurisdictions in the world. In addition, in certain countries the government is very responsive with respectable turnaround times for license applications.

Captive Insurance Companies: An Overview

A CIC is the premier risk-management and tax-planning tool for businesses and their owners. A CIC is simply a small insurance company that is owned by one or more business owners to provide insurance for the business(es). A CIC is an insurance company, not an insurance product.

A CIC provides a number of advantages for a business.

• Lower Insurance Costs
• Cash Flow
• Risk Retention
• Coverage of Difficult Risks
• Risk Management
• Access to the Reinsurance Market
• Tax Minimization and Deferral

CIC Tax Savings

Your company is legally able to deduct up to $1.2 million per year. Your insurance company receives the $1.2 million tax-free.

Year 1, $1.2 M
Year 2, $1.2 M
Year 3, $1.2 M (and so on year after year)
--------------------
Total $3.6 million in tax deductions in the first three years, for example, $4.8 million in four years and so on.

Section 831(b)
Section 831(b) of the US tax code permits the CIC to receive up to $1.2 million per year in insurance premiums----completely tax free. This means that the business paying the premiums will deduct up to $1.2 million per year for insurance costs, but that amount is not taxable to your CIC. All investment income in the 831(b) CIC is taxed at normal corporate rates (which starts at 15%). When a CIC is sold or liquidated, its owners will pay tax on gain in the value of their stock at long-term capital gains rates (currently 15% federal).

Section 50(c)15)
Section 501(c)(15) of the US tax code provides that if the total “gross receipts” to the insurance company is $600,000 or less annually, then the entire company is tax exempt “Gross receipts” includes both premium income and any other realized income (such as gains from the sale of stock). The premium income must exceed all other types of income.

Captive insurance is actually quite simple.

1. On one hand, you own a business.
2. On the other hand, you own a small, licensed insurance company.
3. Your business pays insurance premiums to your own insurance company.
4. Legitimate insurance is deducible a an “ordinary and necessary business expense.”
5. Up to $1.2 million in insurance premiums received by your insurance company are tax-free under section 831(b) of the Internal Revenue Code.

Candidates for a Captive Insurance Company

1. Businesses looking to replace expensive insurance, such as general liability, workers compensation, property and casualty. Typically need premiums of at least $750,000 for a captive to make sense.
2. Businesses looking for supplemental insurance, or to save taxes. Candidates will generally be closely-held businesses, have gross revenue of $5 million or more annually, and have annual cash flow of at least $500,000.
3. Physician Groups (large and small)

Who Uses CICs

Is this legal? Is it actually done by big companies? Yes. Eighty percent (80%) of the Standard and Poor 500 (S&P 500) companies own one or more captive insurance companies.

In fact, here are some examples of some well-known companies and their insurance companies:

Moreover, the concept is fully supported by revenue rulings.

There have been a number of cases and revenue rulings over a period of several years that have supported these two fundamentals:

• In 2001 the IRS lost a $600 million case against United Parcel Service. It lead them to abandon their own “economic family theory.” In the case, they tried to assert Rev. Rul. 77-316 where they said that since the subsidiary insurance company is part of the same economic group that the parent company should not be able take tax deductions for premiums paid to an insurance company that it owns. They lost this case as well as many others they attempted to assert under the same theory. As a result, they made Rev. Rul. 2001-31 that stated that they would no longer dispute the legitimacy of the captive insurance company as a valid insurance concern for federal income tax purposes.
• In addition, in the year 2005, Rev. Rul. 2005-40 highlighted that risk distribution is as significant as risk shifting. It outlines four circumstances where the insurer is qualified as an insurance company for federal tax deductibility. In addition, the ruling points that the important issue is risk distribution and not the association between the insured company and the insurance provider.

The ability to take the tax deductions are the same whether the company is formed in the US or if it is formed abroad and has made the 953(d) election. Thus, an offshore captive insurance company is considered a domestic insurance company for tax purposes.

What do you care about most? The intricate details about how a television works or that you can turn it on and it does work? If you prefer to want to watch TV rather than diagram its circuit boards, you can think of the captive insurance company in the same vein. A captive insurance manager will be assigned to your company to make sure that you operate within the proper legal framework.

A CPA who regularly files returns for insurance companies can take care of the tax requirements. So, by addressing the subject in a simplistic fashion, we are not saying that there are not intricacies that need to be addressed. We are saying that you are not the one that needs to address them. Experts will handle that aspect. Thus, you can focus on running your business. Your captive insurance manager will focus on managing your insurance company.

Will you do business with and accept premiums from the public? Not likely. Accepting premiums from members of the public requires additional licensing in each state. So, yes, you will more than likely insure your own business and not those of others.

Our organization forms captive insurance companies. So, if you are ready to form your own such company or if you have more questions feel free to call right now at 1-800-959-8819. Talk to a live person, 24 hours per day, 7 days per week.