The Investment Scientist

Captive Insurance: A Business Owner’s Heaven?

Posted on: July 29, 2013


Captive Insurance

I went to a conference for CPAs last week, and my biggest takeaway was a concept called captive insurance.

This is the concept of a business owner setting up an insurance company to insure the risk of his/her own business. Thus the name captive.

But what’s in it for one to have one’s own insurance company?

Tax Mitigation

It turns out that Congress has created legislation to encourage captive insurance – some would call that a tax loophole. IRC 831(b) states that small insurance companies ($1.2m or less in annual premium income) pay tax only on investment incomes. In other words, they don’t pay tax on premium income.

Can you see the tax loophole here? If a business pays its captive insurance company $1.2m in insurance premiums, the premium is deductible to the business and yet tax exempt to the captive insurance company. Depending on the tax structure of the business, this could mean a tax saving of 40% to 70%.

But tax savings aren’t the only major benefit!

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Wealth Accumulation

Many business owners have very little wealth outside of their business. Captive insurance allows them to accumulate wealth within their captive insurance company, while still making the money accessible to their business.

Wealth Protection

All the money that is growing in the captive insurance company is money removed from the business, therefore beyond the reach of any potential creditors or legal claimants.

Wealth Transfer

If a business owner has the intention of leaving substantial money to an heir, he/she could make the heir the owner of the captive insurance company. All premiums paid to the insurance company is money removed from his/her estate. Depending on which state he/she is living in, this could be an estate tax saving of 40% to 60%.

If that is not a business owners’ heaven, I don’t know what is.

But before I can recommend this, I need to find out, “What’s the catch?!” If you know of one, leave a comment below.

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4 Responses to "Captive Insurance: A Business Owner’s Heaven?"

From doing a quick read of this article it sounds like you have to operate it as a TRUE insurance company or you are in for trouble. Sounds like it may not be worth all the hassle:

These guys are good at what they do and should be able to guide you.

Jim, the works of that can be delegated to an insurance managers. I found out there is a well developed market for that. The typical cost of pure captive is $100k setup and $50k+ ongoing.

Thx for the link Jeremy. Jim, this is an example of a captive manager.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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