A Captive Insurance Company is essentially a private company that acts as an insurance company for a client’s own business or personal lines of insurance. Such companies are a form of self-insurance whereby the insurer is owned wholly by the insured. Captive Insurance companies are typically established to meet the insurance needs of the owners or members, however, they also can provide substantial income tax and asset protection benefits, such as:
- Tax deduction for the parent company for the insurance premium paid to the captive;
- Opportunity to accumulate wealth in a tax-favored vehicle;
- Distributions to captive owners at favorable income tax rates (at “capital gains” rates);
- Assets may be protected from the claims of business and personal creditors;
- Reduction in the amount of insurance premiums presently paid by the operating company;
- Insuring risks that would otherwise be un-insurable.
This form of planning is sophisticated and often involves the formation of one or more foreign entities to act as the insurance company. Additionally, a Captive Insurance company and its operation are subject to certain IRS requirements in order to qualify for the sought benefits. As such, this technique may not be suitable for all clients. A client may benefit from captive insurance company if the client has:
- A profitable business entities seeking substantial annual adjustable tax deductions;
- Businesses with multiple entities or those that can create multiple operating subsidiaries or affiliates;
- Businesses with insurable risk that is currently uninsured or under-insured.