Why form a Captive Insurance Company?
Conventional third party insurance policies insure a bundle of risks that may not be particularly relevant to you. A standard package may include both relevant and comparatively irrelevant risks, and yet you pay for both. In other words, you may be paying for coverage that you don’t need while “going naked” on coverage that you do. Third party insurance premiums also include markups for things like marketing expenses and large underwriting departments, which may not benefit you at all. These additional costs are reduced or eliminated with captive insurance.
The attorneys and insurance managers who assist you in forming your captive are experts at identifying relevant but often over-looked risks. Because captives offer the ability to obtain tailor made insurance, your business should be better prepared to survive the unexpected.
The potential savings realized by obtaining cheaper and more relevant types of insurance, combined with the tax savings that captives provide, may result in significant improvements in your business’ after-tax cash flow. There is also a decided advantage in being able to time the premium payments to the company’s natural cycle of cash flow.
Studies show that businesses which own a captive better manage their risk than 3rd party insurance companies, allowing captives to have a much lower loss ratio. Captives are often therefore highly profitable. These profits can be invested in ways that which generate valuable investment income. The result is often a new profit center for your business enterprises.
Properly formed and maintained, the profits of a captive are very well insulated from the creditors of both the business and the business owners.
If your captive is owned by your children or a trust for the benefit of your children, then premiums paid to the captive each year are effectively removed from your taxable estate without gift taxes.