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Posts Tagged ‘captive insurance

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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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Author

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

Twitter: @mzhuang

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