It seems a day doesn’t go by when I hear a business owner say “I’m not doing anything until after the election.”
This indecision certainly makes sense on many fronts, particularly when considering questions like:
- “Should I hire right now?”
- “Should I modernize equipment?”
- “Should I invest in advertising or wait?”
- “Should I buy out a business competitor who is ready to sell?”
- “Should I take on an additional partner?”
- “Should I add a new store or make a real estate investment?
But, when it comes to experiencing the risk mitigation and tax saving benefits of adding a captive insurance company to your business portfolio, it won’t make a difference if Mitt Romney or Barak Obama wins in November.
What is a Captive Insurance Company?
A captive is a unique insurance company with traditional components, such as reserves, surplus, policies, policyholders, and claims. It is a sophisticated way to self-insure and is generally formed to insure the risks of its owners and related or affiliated third parties.
What are Some Advantages of Captives?
The advantages of owning your own captive insurance company are numerous. Some of the most beneficial attributes of captives are:
- Customizable coverage and increased claims control
- Flexible policy terms & premium payment options
- Premiums based on experience of your company, not industry standards
- Access to reinsurance markets
- Wealth accumulation and preservation
- Favorable tax treatment of “small insurance companies”
A captive can also be a very powerful vehicle for wealth accumulation and preservation.
- Premiums are paid to your captive with pre-tax dollars, and accumulate tax-free as reserves of the captive
- Accumulated reserves of the captive can be translated into virtually any other type of investment or asset (some domiciles have restrictions)
- Premiums paid to your captive are in effect a “transfer of wealth” and are protected from your operating company’s creditors and lawsuits
- Captives also provide an excellent opportunity to transfer your estate to your children and avoid estate and gift taxes (children can be part owners of a captive insurance company)
Captives can receive favorable tax treatment by the IRS as “small insurance companies”
- The IRS defines insurance companies who earn less than $1.2 million of premium income per year as “small insurance companies” or “mini-captives”
- Section 831(b) of the IRS code allows electing mini-captives to exclude up to $1.2 million of premium income per year from their taxable income
- Captives formed offshore who insure risks onshore can elect to be taxed as a domestic company under Section 953(d) of the IRS code and avoid most of the foreign company reporting requirements
- Claims paid by the captive are paid from pre-tax dollars and are not recaptured as income by the operating company, so the captive effectively acts as a legal tax shelter for the premiums received from its insured
The Window to Form a Captive and Pay Premiums in 2012 is Rapidly Closing
It takes 60 to 90 days to form a captive insurance company. Now is a great time for businesses to consider deploying a captive insurance company or expanding the role of their existing captive. Call us to discuss whether or not a captive insurance company is the right move for your business.