A captive insurance company, or just "Captive", is formed by a business owner to insure the risks of affiliated businesses. A Captive lets a business manage its risks while at the same time potentially providing a lot of benefits, such as cash flow, access to the reinsurance market, risk retention and management, estate planning benefits and more.
The premiums received by the Captive are invested and not "lost" as if they were paid to an unrelated insurer. The premiums accumulate over time and are available to pay for business risk losses which are self-insured, thereby avoiding a negative impact to the business’s bottom line.
Captives provide an opportunity to insure against risks that are generally self-insured, uninsurable or too difficult to insure due to the lack of coverage available in the commercial market or the high cost. With a Captive, self-insured risk can be converted into tax-deductible premiums that are paid into a privately held and licensed insurance company. Risks can now be addressed with this pre-tax nest cash you’re holding on to. It’s important that a client realize that the Captive is a licensed insurance company and that claims have to be expected. Thus, commercial insurance must be maintained for certain risks the Captive should not insure because the possibility of catastrophic loss is too high, or the number and types of claims pose a significant risk.
While Captives provide a great amount of benefits, there are a lot of things to consider before going down that road: The appropriate type of Captive, the appropriate jurisdiction, size and much more, not to mention the licenses, new bank accounts, and other regulatory and legal procedures involved.
Fortunately, Garza & Harris are experts when it comes to implementing captive insurance companies and positioning them to make the most out of your pre-tax dollars, plus keeping more money in your pocket. We’ll take care of the whole time-sensitive process, and dive into deep analysis in order to choose and customize the right Captive for you.
Captive insurance companies provide many business and tax planning opportunities, including the ability to obtain commercially unavailable or commercially unaffordable risks and an income tax deduction for premiums paid. Despite the benefits of creating a Captive insurance company, it’s important to recognize the risks and responsibilities that accompany them. A refusal to follow the requirements in creating a Captive would be a costly mistake. Although you’ll incur administrative costs in the implementation and maintenance of a Captive, its substantial benefits outweigh those costs. Plus, Captives can be an invaluable tool for business and estate planning. A profitable Captive can even transfer wealth to future generations where a trust for the benefit of the client's spouse or descendants owns the Captive.