The basics behind captive insurance
As part of a closely-held business owner’s effort to ensure the success of their companies, a captive insurance company can offer a strategic way to help protect the assets in that business. For clients who own businesses that have significant and continual free cash flow, we will explore the value of setting up a captive insurance company. This “business entity” provides additional coverage for:
- risks that the owner is already assuming yet may be too expensive to insure,
- risks that can’t be insured with traditional insurance companies, or
- risks that when insured on your own can reduce the costs of general liability insurance.
Ideal candidates for this type of policy are professions that contain meaningful and legitimate risks. Examples include: a dentist, doctor or lawyer (each of whom has a heightened reputational risk to protect), or a manufacturer (who might have an increased likelihood of workers compensation claims or supply chain interruptions).
At Fort Pitt Capital Group, we identify clients that fit this mold and talk about self-insured risks that can be covered by setting up a captive. If a client is comfortable with this strategy, we then put together a team needed to create and support this entity. The team consists of a captive administrator (to oversee compliance), a tax attorney (to draft a tax opinion letter) and Fort Pitt Capital to manage the assets within the captive.
Once the captive is in place, there are a variety of prominent benefits:
Asset security. If you are putting money into a captive and you have to file bankruptcy, the funds in the captive are protected against claims from creditors.
Available funds. As assets build in a captive, it can help to fund operations if a business experiences “down” years. Although it’s a last resort (the captive is taxable at capital gains rates), it will provide accessible funding in the event it is needed.
Stays outside of estate. If a captive is drafted properly, the captive owner can pass captive funds to heirs – upon the owner’s death—and avoid Federal estate taxes.
Tax deductions and savings.While this shouldn’t be the main reason to set up a captive, every dollar that you put into a captive is considered a premium expense for your business. Owners can claim this premium as a tax deduction for their business and potentially receive significant tax savings as a result.
While captives can provide considerable opportunities to a small business owner, it is vital that it be set up properly. Additionally, given the annual payments, businesses must be certain that they have consistent cash flow that can support such premiums. When this is the case, a captive insurance company can provide a wide range of potentially significant benefits.