Captive insurance companies are like other insurance providers, except with one major difference: you control the company. A captive is owned by those who are insured by it, and that provides valuable advantages to businesses and their owners. When properly structured, a captive insurance company will yield the following benefits to your business:
- Fill in coverage gaps: The primary purpose of a captive insurance company is to provide insurance against risk to your business. Other insurance providers may have gaps in their coverage, or you may face scenarios that are otherwise uninsurable. A well-designed captive can protect you against these risks in addition to any coverage provided by outside sources.
- Asset protection: Assuming the captive is formed for the above purpose (to insure you against risk), it can also provide the benefit of protecting assets used within it. Since a successful business is an attractive target for lawsuits, placing some of those assets within a separate entity—i.e. the captive—will keep it out of reach of creditors. The captive will likely have no liability when it comes to suits leveled against your business, so the assets placed within it will be safe.
- Lower premiums: Most insurance companies exist to turn a profit by taking on risk. Your captive, however, can be designed in such a way that forgoes maximizing revenue in favor of providing affordable coverage to your business. It can—and should—still turn a profit, but you can also save money with lower premiums.
- Tax benefits: A captive must be designed for the purpose of handling risk in your company. As such, tax benefits must be purely ancillary. Nevertheless, the high exemptions on premiums associated with captives can allow you to reduce the taxes you would normally have to pay on the wealth within it.
- Profit: Any company needs to turn a profit in order to be successful, and captive insurance companies are no different. While the revenue that comes in may not necessarily be as high as those an external insurance company might receive (for reasons mentioned above), they can still be profitable as a separate corporation.
Of course, in order to receive these benefits, the captive must be structured correctly. It must have the purpose of insuring you against real risks, and it should also be organized in a way that minimizes tax liability and enables it to function as an insurance company should. This allows it to do its job well while also protecting assets from seizure, affording extra tax benefits, and increasing your overall profitability.
If it’s not properly structured, your captive can run into problems and even become a liability. If, for example, you fail to properly assess risks and the company takes on more than it can financially handle, then it won’t be too useful to you. In another example, if it becomes apparent that it was structured solely for tax benefits, the IRS can sweep in and cause major headaches. Correct structuring is vital. Legal help, such as what you’d find at Hart & David, can help you put everything together effectively.