In a recent article published in the January issue of Business Insurance, Phil Karter, JD and Katherine Jordan, JD of Chamberlain Hrdlicka discuss life insurance as an asset class for captive insurance companies. In the article, Karter and Jordan explain several scenarios that demonstrate a captive investing in life insurance should not be treated any differently than a captive investing in other types of assets, assuming it meets requirements imposed on insurance companies by the jurisdiction in which it operates.
“There are no grounds to create an artificial distinction between captive investments in life insurance as opposed to other investment assets. Captives should remain free to make decisions about how to invest their surplus capital, including the purchase of an asset long considered a safe and highly flexible investment choice, without fear that it might lead to an IRS challenge to the legitimacy of the underlying captive insurance arrangement.”
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Karter and Jordan also address the U.S. Tax Court’s decision in Benyamin Avrahami and Orna Avrahami v. Commissioner of International Revenue and its impact on small captive insurance companies.
In the case, the court sided with the IRS, as Karter and Jordan state, “Deductions claimed for insurance premiums were disallowed, but the Tax Court concluded that no penalties should be imposed because the taxpayers still “acted reasonably and in good faith” in relying on the advice of their professional advisers.”
However, taxpayers engaging in small captive insurance company transactions should remain confident that their captive arrangements will be respected in most situations.