global Tax The Benefits of a Well-Designed Captive Insurance Strategy September 22, 2014 Improve risk management, save on insurance and protect your assets with a captive insurance company (CIC). Are you looking for insurance to supplement your commercial coverage? Is your company effectively self-insuring a variety of risks that may be considered insurable? For years, businesses have been receiving better rates on reinsurance through captive insurance companies (CICs), as well as procuring additional coverage on exposures that they currently self-insure. CICs are companies that provide risk management services for their parent companies and hold a number of tax and risk management advantages for those who use them. Benefits of a Captive Insurance Company for Your Business The potential benefits of setting up a CIC can include: Tax-Efficient Risk Management. Companies can actually build up an annual premium that is entirely deductible on a variety of risks that they are self-insuring. Without a CIC, these risks would only become deductible when there is an actual payout. In addition, CICs generating annual premium income of $1.2 million or less (considered small CICs), are only federally taxable on their net investment income. Under section 831(b) of the IRC, net premium income is tax free. Many states around the country also offer favorable tax treatment for CICs as well. Estate & Succession Planning Advantages. Forming a CIC opens up planning opportunities for wealth shifting or compensating key employees in a more tax efficient manner because a CIC does not have to be owned by the same shareholders or in the same proportion as the related operating company. In fact, under IRS guidance, a shifting of risk (or “risk distribution”) is actually required in order for the CIC to be respected as a bona fide insurance company. Cost Savings. In addition to the tax benefits, there are potential cost savings involved in forming a CIC. A CIC exposes an individual directly to the reinsurance market. This provides the possibility of more favorable pricing on insurance premiums that a company would otherwise not have without a CIC. Attractive Companies for CICs Ideal candidates for a CIC strategy is a business that is showing consistent overall profitability and positive annual cash flow, and is spending at least $500,000 annually on all lines of insurance combined, including health. A CIC could be a great advantage for your company. Insuring and protecting is vitally important for the growth and prosperity of your business. The IRS has increased its scrutiny of CICs and it is important to work with a knowledgeable advisor to help you properly establish a CIC strategy that will meet the requirements of both federal tax law, as well as state insurance regulations. Any member of our team can assist you with assessing whether a captive insurance strategy makes sense for your business. For more information, please contact us.