TECHNOLOGY
Demystifying and Creating a
Captive Insurance Company
By Jeremy Colombik , CPA
A captive insurance company is created to insure the risks of a specific business . Even though a business can transfer risk to an insurance carrier , exclusions in conventional insurance contracts often force business owners to absorb the hefty costs of a claim . Fortunately , owning a captive can minimize or even eliminate these exclusions .
To create a captive , an individual typically hires an attorney or an experienced captive management firm who establishes an insurance company . Once licensed , the captive functions just as most insurance companies do . It can sell insurance coverage ( but generally such sales are only made to its owners ), receive premium dollars , invest those premiums to pay claims and , when needed , approach the reinsurance market to purchase reinsurance to cover losses . These coverages allow the owner to simultaneously manage its risk and potentially minimize its current insurance cost by having the captive assume that risk .
If its insurance claims are low , the captive could accumulate significant money , thus creating a profit center for its owner . The structure of the captive will determine the manner in which the income of the captive is taxed during both the accumulation and the payout phases . Of course , a properly structured captive can minimize the tax impact of gains realized by the captive .
For the first time in 30 years , there have been significant changes to the IRS code pertaining to captive insurance companies . Specifically , there are two main modifications . First , starting in January 1 , 2017 the limits for an IRC 831 ( b ) election will increase from $ 1.2 million per year to $ 2.2 million per year . So , what is an 831 ( b ):
831 ( b ) effectively allows a small insurance company currently to receive up to $ 1.2 million per year in premiums , without paying any income taxes on those premiums .
The 831 ( b ) election has no effect on the deductibility of the premiums paid by the operating business to the Captive . Premiums are otherwise deductible ; they may be deducted by the operating business just like any premium payments to a Captive .
This creates a current tax deduction of up to $ 1.2 million for the operating business once premiums are paid to the Captive . In turn , the Captive does not pay any income taxes on the receipt of those premiums .
59 TODAY ’ S PRACTICE : CHANGING THE BUSINESS OF MEDICINE 59 TODAY ’ S PRACTICE : CHANGING THE BUSINESS OF MEDICINE