- Special Use Captives Insurance
Special Use Captives Insurance
Many business owners unknowingly retain an alarming amount of risk in the form of deductibles and exclusions on existing insurance policies as well as uninsured and underinsured exposures relating to a variety of other business risks. Examples of industry groups and commercially uninsurable/underinsured risks that businesses may inadvertently assume include but are not limited to:
- Construction - construction defect and mold coverages typically excluded by a General Liability policy
- Manufacturing - product liability excluded by a General Liability policy
- Professional Services - administrative actions excluded by an Errors and Omissions policy
- Real Estate - mold, weather, and other exposures typically excluded by commercial insurance policies
The problem with retained risk is typically there are no loss reserves set aside to finance future liabilities. When uninsured losses do occur they are paid from profits which have already been taxed. Businesses that have structured captive insurance programs making an 831(b) election finance retained risk using pre-tax dollars which are converted into tax deductible property and casualty premiums which are paid and ceded to a privately held captive insurance company. In the event that claims do not materialize underwriting profits and investment income are distributed to business owners, key executives, and/or family members all at favorable tax consequences.
Captive insurance programs enable business owners to more efficiently manage retained risk with greater tax efficiency. Captives also offer the added benefits of pre-tax wealth accumulation, asset protection, highly efficient estate planning/wealth transfer, and provide incentives for the retention of key employees. Additionally, captives are powerful year-end planning tools because insurance premiums are tax deductible and flow tax free to the captive.
Good candidates generally meet two or more of the following criteria:
- Profitable operations with taxable income ranging from $1,500,000 to $100,000,000
- $250,000 of premiums related to self-insured/uninsured business risk
- 100 or more employees
- Pay more than $500,000 in property and casualty premiums
Captive insurance programs are unique and complex but can be structured in a relatively quick amount of time due to our experience and the quality of the service partners we represent.
This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.
