Accumulating Reserves in Your Captive: Life Insurance as a Captive Asset
For any captive to be successful, it must do three things well: (1) operate as an independent and legitimate business, (2) manage its costs (including claims), and (3) manage its assets effectively. CIC Services is here to help with all three of these things, and going forward we’ll be sending you periodic updates, like this one, describing how we do so.
Today’s update will focus on the need for captive insurance companies to manage their assets appropriately. A captive’s assets back the policies it issues. Consequently, its assets should be managed to maximize profits insure its claims paying ability. This means that a captive’s capital structure should ideally be liquid, stable, and offer reasonable returns.
Unfortunately, in today’s low interest rate environment, earning a decent return while avoiding risk and maintaining liquidity is no easy task. In fact, thanks to the Federal Reserve’s zero interest rate policy, it’s nearly impossible. For this reason, and others, many clients have explored alternatives like high-cash-value Equity Indexed Universal Life Insurance (“EIUIL”) and realized great success.
EIUL earns interest each year tied to the performance of some underlying benchmark, such as the S&P 500. As the S&P was up over 13 percent over the last twelve months, clients who invested in EIUL earned nearly that much. That’s certainly a reasonable return these days. But…what goes up must come down, right? The stock market is risky, after all.
True, but with EIUL you’re not invested in the market. Rather, your money is on deposit with a highly-rated life insurance company. Each year that company credits you interest that is linked to, in this case, the S&P 500, but with a guarantee that the interest they credit will never be negative. So, your money enjoys a market-based rate of return but isn’t exposed to market downturns. How does this work?
Phone – 865- 386-4920
E-Mail – Tom@CICServicesLLC.com
Web – www.CICServicesLLC.com