Many businesses find it difficult to find adequate, affordable insurance for their unique business risks on the commercial insurance market. As a result, they are faced with either overpaying or under-insuring. Captive insurance companies – an insurance company that is owned by the insured party – provide an excellent solution for managing difficult-to-insure enterprise risks and may have the additional economic benefits.
Captive insurance companies allow the controlling business both to deal a business’ unique insurance risks and also to capture premium payments if no claims are made. When captives are established according to accepted actuarial standards and relevant state and federal regulations, the underlying company obtains both risk-shifting and risk-distribution and also avoid the problem of the “premium vacuum.”
Currently, under Federal law, a business can contribute tax-deductible insurance premiums to a captive insurance company. As of 2017, Internal Revenue Code Section 831 allows up to $2,200,000 in premiums to be income tax free to the Captive. In the Captive, those premiums are kept liquid, invested, or used to purchase reinsurance. Eventually, if a claim is made against the insurance policy, the insurance payments are tax free. If no claims are ever made, or if the captive has assets remaining as the underlying business winds down, it can continue as an independent operation or dissolve, distributing assets as a return of capital or as a distribution to the Captive’s owners taxed at favorable dividend or capital gains rates.
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