September 2013

In our weekly articles we have discussed the tremendous business benefits of owning a small insurance company – specifically a Section 831 (b)  captive insurance company.  Four very common benefits are:

1. To formally self-insure business risks with tax deductible dollars
2. To protect assets
3. To accumulate wealth and earn additional profits
4. To more effectively transfer assets  to one’s heirs

And, owning and operating a captive insurance company enables a business owner or owners to achieve all 4 benefits outlined above at the same time in one vehicle.  Captive ownership also affords many ancillary benefits, including the efficient removal of earnings from a C Corporation.

The Challenge – Retained Earnings “Trapped” in a C Corp

I am often asked, “Why would I want to own my insurance company?”  I often reply, “Why would you want to own the real estate and building where your business operates?” or, “Why would you want to own equipment used by your business?” or, “Why would you want to own your own fleet?”

In addition to their primary, functional benefits, buildings, land, equipment, fleets and other assets provide secondary benefits as well.  For example, they can serve as a vehicle for wealth accumulation.   Or, in this low interest rate environment, it’s cheaper to finance and own equipment instead of leasing it.

The same can be said of owning your own insurance company – specifically, a captive insurance company.  In addition to gaining the ability to self-insure and to own a profitable second business, a captive insurance company can also afford its owners with numerous ancillary benefits.

This article will discuss leveraging ownership of a captive insurance company to facilitate the sale of a business. 

A fabulous ancillary benefit of a captive  insurance company is that it can provide a very efficient vehicle for the transfer of wealth to one’s heirs.  But, before discussing this unique benefit, it’s worthwhile to  review the primary reasons that businesses form their own insurance company – specifically a captive insurance company.

1. To manage business risk by formally self-insuring certain risks with pre-tax dollars
2. To protect assets from creditors of the operating business and its owners or other risks
3. To realize profits and accumulate wealth inside of a separate business entity

These three  are well known as the primary reasons that legitimate captive insurance companies are formed.  However, a captive insurance company can also afford many ancillary benefits to its owners including utilization as an incredibly efficient means of transferring assets or wealth to one’s heirs.

Common Obstacles Preventing the Efficient Transfer of Assets or Wealth to One’s Heirs  

A challenge common to many business owners is the transfer of assets and wealth (including the business itself) to the owner’s heirs.  Estate tax, also known as the “death tax” can be stifling.  And, many estates spend prolonged periods of time in probate while legal fees mount.

The Solution

Cyber attacks are on the rise and their impact on businesses can be significant.  An August 28 article in FLEET OWNER (FleetOwner.com) titled Considering Insurance Against Cyber Attacks notes that cyber attacks are a growing threat to businesses from both an operational and financial standpoint.  While the article is directed at the transportation industry, many businesses face the same risks.  Technological advances bring many benefits to businesses but also bring new threats.

The article notes,  “Projecting electronic information against attack or theft is becoming a paramount concern among all businesses these days, especially in the transportation industry, which is increasingly reliant on digital connections for a wide range of operations.”  Most businesses are not insured against cyber attack.  Yet cyber attacks are a very real risk.  Fleet Owner notes “It’s becoming more and more common for cybercriminals to use dedicated malicious software to launch attacks on corporations, eschewing widely-recognized malware tools and making it harder to detect and repel intrusions.”