Understanding Captive Insurance Programs
When you run a business, insurance can be a larger cost than you previously imagined. While you cannot eliminate the cost of coverage completely, there are ways to keep the price under control, and one such way is implementing a captive insurance program.
How Does It Work?
You can choose to set up a captive or join one. Establishing your own group captive could be an option for your company if it has at least $200,000 in combined premiums a year. While these companies will have a viable insurance option, the savings of establishing a captive are more profound when a company has more than $1 million in annual premiums. These premiums can include automobile, property, umbrella, casualty, workers’ compensation, and general liability insurance.
In a group captive insurance program, the companies involved combine business, financial, insurance, and business risk into one pool and purchase an aggregate stop-loss insurance policy. By pooling their resources, each company assumes a portion of the liability of the rest of the companies in the policy.
There are many kinds and sizes of group captives, typically varying between 10 and 80 members. The required payments to the captive will vary as well, and some may be as low as $50,000.
Several captives will try to limit their policies to coverage that includes larger and less frequent claims such as property and casualty and use a traditional insurance company to cover the smaller, more frequent claims such as health care.
Why Choose It?
By setting up a captive insurance program, you are essentially establishing a subsidiary company in order to self-insure your business. Many larger companies can do this on their own without pooling resources from other businesses, thus limiting their risk. However, typically we will see a group of smaller businesses who cannot afford to buy traditional insurance form a group captive and purchase a policy together, thus limiting their cost while still maintaining coverage.
Captives are typically going to serve fewer customers than their traditional insurance counterparts, which means that it is more responsive and has better service. In addition, a captive program enables business owners to be proactive about their insurance by examining reports and limiting risks and unnecessary costs.
The business owner has partial, if not complete, ownership of the captive, which will mean that you are able to limit overhead costs and control premiums while preventing unanticipated liabilities. By being able to control premiums, you are able to adjust the costs based on your personal loss, as opposed to having them change due to industry group classifications.
The Tax Impact
Depending on the location of your captive, you may be able to control losses due to taxes. Many groups prefer to benefit from having a domestic program in place, but there are several others who look to offshore captive insurance companies so that they don’t have to pay taxes on any of their group members’ earnings. With an offshore captive, however, the money must remain offshore.
When businesses don’t have complete control over the captive and the captive had written a large amount of insurance claims that did not go to the business in question, they may be able to deduct their premiums. In these cases, there must be proof of a transfer of risk. When a company has a combination of traditional and captive insurance, it is easy to transfer risk, thus qualifying the entire captive policy for these tax deductions.
In addition, timing the loss of deductions is crucial in ensuring that a business can receive payment. While contractors want to take deductions in advance, the IRS prefers companies to wait to deduct losses until the claims are paid. If deductions are made in advance, the IRS will commonly deny them during an audit.
Deciding On A Captive
Making the decision to purchase captive insurance should not be made alone. Contact your trusted tax attorney at JD Katz: Attorneys at Law today!