Micro-Captive Insurance Advantages

Ultimately, a captive insurance company owner benefits from the ability to assume the risk and manage exposure and costs. A “captive” may be formed in a variety of designs; one type being a pure captive which insures the risk of the operating business. Over 30 U.S. states and twenty-nine off-shore jurisdictions (domiciles) have enacted laws that regulate these Captive Insurance companies differently than traditional commercial insurers.

• Improved cash flow
• Risk Management Control & manage insurance costs
• Custom designed coverage for specialty risk
• Manage claims & administration
• Capture underwriting profit & investment income

Basic Requirements for Taxation as an Insurance Company

Without a captive, self-insurance reserves are not deductible. For premiums to be deductible, the captive must be recognized as an insurance company for federal income tax purposes.

• Risk transfer.
• Risk distribution.
• Captive conducts itself like an insurance company.
• Serves a risk management purpose.
• Insurance company taxation creates the risk management benefit/cash flow.

Tax Advantages of a Micro-Captive Insurance Company

Although tax benefits should not be the primary purpose of forming a captive, the following benefits are available with a properly structured Captive Insurance Company.

• A properly structured captive will allow for deductions of premiums.
• This creates more cash available for risk management.
• Generally, the captive can accelerate the deduction for unpaid losses unlike other taxpayers because loss reserves are deductible.
• Small insurance company provision allows for $2.2MM annual premium exemption.

 KEY BENEFITS OF CAPTIVES

The following graph lists all key benefits of captive insurance companies compared to self-insurance and commercial insurance:

Features                                                            Retail                    Self                     Captive

                                                                        Insurance            Insurance           Insurance

• Asset Protection                                            Yes                       No                      Yes
• Risk Protection                                              Yes                       No                      Yes
• Warranty Design  Control                              No                       No                       Yes
• Claims Control                                                No                       Yes                     Yes
• Improved Cash Flows                                    No                        No                      Yes
• Tax Deductible Premiums                              No                        No                      Yes
• Income Tax Benefits                                       No                        No                      Yes
• Underwriting Income                                      No                        No                      Yes
• New Revenue Stream Options                       No                        No                      Yes
• Estate Planning Benefits                                No                        No                      Yes