Captive Insurance Case Study – Wealth Accumulation
If State Farm Were a Business Owner, It Would Enjoy a Bounteous Retirement.
Pause for a moment and imagine that State Farm Insurance Company is an individual business owner. If State Farm had terminated all of its insurance policies on December 31, 2012, what sort of retirement would he or she enjoy? State Farm, All State, New York Life, National Life, Prudential, USAA, Liberty Mutual, Farm Bureau and most other insurance companies would enjoy a bounteous retirement. Why? Because successful insurance companies accumulate significant reserves to insure the risks for which they issue policies.
In many ways, “what’s good for the goose is also good for the gander.” Business owners can own their own insurance companies – specifically, a captive insurance company -, and accumulate and protect significant wealth for the future.
A Captive Insurance Company as a Wealth Accumulation Vehicle
In addition to gaining the ability to self-insure and to own a profitable second business, a captive insurance company can also serve as a remarkably efficient vehicle for wealth accumulation. However, prior to addressing this unique benefit, it’s worth noting the primary reasons that businesses form their own insurance company – specifically a captive insurance company.
- To manage business risk by formally self-insuring certain risks with pre-tax dollars
- To protect assets from creditors of the operating business and its owners or other risks
- To realize profits and accumulate wealth inside of a separate business entity
These are well known reasons that legitimate captive insurance companies are formed by businesses. Assuming a captive insurance company is formed for the above reasons (or similar ones), it can also be an incredibly efficient way to accumulate and protect wealth.
A Common Business Challenge– Building and Protecting Wealth (for Retirement)
Business owners work hard to build their companies, often pouring their hearts and souls into their work. The hard work, personal sacrifice and risks taken to start, manage and lead a business are worthy of reward. Business owners face a critical challenge to build wealth that will 1) protect the business in the future, 2) allow the business flexibility to expand or to take advantage of market opportunities, and 3) to provide for the retirement of the owners when they choose to sell or exit their businesses.
The Significance of the Challenge
It’s a challenging business climate, and it’s difficult to accumulate enough wealth for the future. Businesses faces numerous financial threats including economic uncertainty, more capable competitors, property loss due to accidents or “acts of God,” lawsuits, creditors, taxes, increasing regulations, rising costs of insurance, and rising costs of healthcare.
An outstanding solution for many business owners is to set up and own their own captive insurance company.
Why is Owning a Captive Insurance Company an Effective Solution?
In addition to insuring risks for its customers, one of the primary objectives of any insurance company is to build up significant reserves for the future. And, insurance companies enjoy many tax advantages as they accumulate reserves. Captive insurance companies are no different. When a business owner sets up a captive insurance company to formally insure risk, he or she also benefits by being able to accumulate wealth in a more tax efficient vehicle. Parent companies pay tax deductible premiums to their captive insurance companies. And, premiums paid to an 831b captive insurance company are taxed at 0% (up to $1.2 million annually). The result is a remarkably efficient vehicle to accumulate wealth for the future. In fact, it is more efficient than any profit sharing or qualified plan (e.g. a 401k plan).
And, an added benefit of accumulating wealth in a captive insurance company is near perfect asset protection. There are almost no circumstances where a litigant or creditor would be able to lay a claim against a captive insurance company or its accumulated assets.
What Is A Captive Insurance Company?
A captive is a unique insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a formal way for business owners to self-insure risk, and captives are generally formed to insure primarily though not exclusively the risks of one or more businesses owned by the same or related parties..
How Does a Captive Insurance Company Work?
A captive primarily insures its parent company or related companies. Hence, the parent company is able to purchase insurance from its captive, and it can insure risks that third party insurers will not insure or risks where third party insurance cost is unaffordable.
Some examples include (but are not limited to):
- Loss of a key account
- Loss of key personnel
- Loss of a license or certification
- Loss of a sales or distribution territory
- Loss of dealership rights
Premiums are paid from the parent company to the captive with pre-tax dollars. The captive can invest its assets mostly as its owners choose (some domiciles have restrictions).
Call us to discuss whether or not a captive insurance company or additional captive insurance company is the right move for your business.
Phone – 865- 599-6104
E-Mail – Randy@CICServicesLLC.com
Web – www.CICServicesLLC.com