The Benefits of Captive Insurance Companies

The Benefits of Captive Insurance Companies

Captive insurance entities were once solely used by large corporations as a means of saving on insurance premiums and tax dollars. However, a growing trend amongst successful closely held businesses is toward the formation of captive insurance entities. This trend is in large part due to the 26 U.S.C. § 831(b) election which allows the captive insurance entity to be federal income tax free on gross premiums of $1.2 million. These entities, commonly referred to as “mini-captives,” avoid tax on its premium income and owe tax only on its investment income. While the concept of the captive insurance entity and the benefit towards closely held businesses is forthcoming, the statutes, case law, regulations, and stringent standards of the IRS make managing the captive insurance entity difficult.
           
The basic structure and method that a closely held business benefits from the captive entity is as follows. Generally, a business deducts insurance premiums from gross income and therefore does not pay federal income tax on that amount. The same principle applies to the closely held business’ newly formed captive insurance entity. The catch is that instead of paying insurance premiums to a third party provider, the closely held business is paying insurance premiums to its own captive entity which in turn uses that insurance premium income to invest elsewhere tax free. The captive insurance entity then only pays federal income tax on those investments. For more information and a thorough analysis of the benefits and difficulties with captive insurance entities, please see the link above.

– Daniel J. Granatell, Esq.

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