Game Changing Financial Vehicle For Mid-Size And Small Business Owners
The term “game changer” has often been used to describe people or entities that break from the established or expected norms. A “game changer” often defies existing paradigms or creates new paradigms. In sports, a “game changer” is often an athlete that is far superior to his or her contemporaries, is very versatile or seems to always deliver in high impact situations.
The same can be said of “game changers” in business. However, in business, “game changing” behavior is often a matter of discovery or invention, unlike sports where “game changing” behavior is almost always the result of raw talent and hard work.
Our passion is discovery and invention. Since our inception, we have been in the business of helping clients invent a superior risk management strategy and discover their own game changing financial vehicle. Our superior risk management approach is Enterprise Risk Management (ERM) adapted for mid-size and small businesses. While implementing ERM, clients discover the powerful financial advantages afforded to them by owning their own insurance company. An insurance company is a powerful financial vehicle that can provide tremendous added value to businesses and business owners. In this case, we are describing what is known as a captive insurance company or small casualty insurance company under the Internal Revenue Code section 831 (b).
First and foremost, a captive insurance company can provide more effective risk management and casualty insurance protection to a parent company or companies. It forms the backbone or chassis of ERM for mid-size and small businesses. To read more about ERM, CLICK HERE. Not surprisingly, improved risk management is the primary purpose for creating a captive insurance company.
However, a captive insurance company also affords many ancillary benefits to the business, its owners and its CFO. Owning one or more captive insurance companies enables business owners to solve for many other financial needs and wants. We know of no other financial vehicle that delivers such a wide range of benefits.
Owning a captive insurance company as part of an ERM strategy can enable business owners and professionals to more effectively address the following wants and needs:
- Reduce insurance costs
- Improve risk management and insurance protection
- Experience tax savings
- Improve asset protection
- Accelerate wealth accumulation
- Facilitate estate transfer to future generations
- Provide an alternative to non-qualified retirement or deferred compensation plan
- Provide golden handcuffs or golden parachutes
- Facilitate buy-sell, buy-in, or buy-out arrangements
- Provide an alternative to qualified retirement plans
It is important to keep in mind, that while all the above ancillary benefits have significant value, when forming a captive insurance company, one CANNOT choose to do so primarily for the ancillary reasons above. The captive must be formed for the primary reason of enhanced risk management, insurance protection, and asset protection. An experienced attorney and captive management firm can ensure captives are set up properly with an operating plan and procedures that meet the requirements necessary to function as a licensed insurance company.
What Is A Captive Insurance Company?
A captive is a unique but REAL casualty insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. In addition to forming the backbone of an ERM strategy, it is a formal way for business owners to self-insure, and captives are generally formed to insure the risks of owners and related or affiliated third parties.
There are many risks that all businesses regularly face and informally self-insure. It’s worth noting that businesses informally self-insure with after tax dollars, meaning that a business’ “rainy day fund” is usually comprised of retained earnings that have already been taxed. With ERM and a captive in place, businesses can formally insure risks not normally insured by third party insurers.
Premiums are paid from the parent company to the captive with tax deductible or pre-tax dollars, and can accumulate tax-free as reserves of the captive (up to $1.2 million annually). Reserves can be transferred into virtually any other type of asset (some domiciles have restrictions). Hence premiums paid are in effect a “transfer of wealth” and are protected from the parent company’s creditors and lawsuits.
While ERM with a captive don’t fit all business situations, countless business owners are missing out on the game changing benefits that ERM with a captive insurance company can provide them. Discovery is the first step.