Insurance coverage can be one of the larger expenses for your business. Depending on your location, your industry, and your claim history, it may be difficult to find affordable insurance that also covers what you need. One option that some companies use is a captive insurance company, or a captive. This type of company can provide solutions for some of the trickiest insurance problems. So, what is a captive insurance company? Read on for all you need to know about this kind of company and what it might mean for your business.
What Is a Captive Insurance Company?
A captive insurance company is created by a parent company and provides the insurance coverage for it and all of its subsidiaries. The captive will be a subsidiary and wholly-owned by the parent company. A captive insurance company works in much the same way as a regular insurance company. It will collect premiums, provide an insurance policy, and pay out claims as needed. However, there are ways to set up the captive so that it provides strong benefits to the parent company.
Benefits of a Captive Insurance Company
It may sound strange for a company to provide insurance for itself, but a captive insurance company is legal, common among mid-sized and larger businesses, and has some important benefits. The captive insurance company can provide custom coverage options, tax relief, and provide important cash flow.
Custom Insurance Coverage
One huge pro of a captive insurance company is that it can provide adequate insurance coverage for your difficult-to-insure business. Since you’re setting your premiums, you can be sure you’re also getting the best price possible for your insurance. If your business is having a hard time finding affordable insurance coverage, consider creating a captive insurance company.
Tax Exempt or Tax Deferred Premiums
For captives based in the United States, the IRS tax code section 831(b) sets out rules for creating a captive insurance company whose premiums will be taxed at a 0% Federal tax rate. Premiums paid to captives that are founded in low-tax countries will offer other tax relief as well. Though the tax benefits can be substantial, they are also highly regulated instruments, so consult an insurance lawyer as you explore the captive option.
Cash Flow
One big advantage of a captive insurance company is the ability to invest unearned premiums. If premiums are paid in advance, but claims are paid out slowly, the premium money can be invested and generate income. This is a great way to create a cash flow stream.
Risk Mitigation
Your captive insurance company will have access to claim information for your parent company and all of its subsidiaries, providing key data to analyze and assess future risk. This benefit of a captive insurance company provides an extra level of risk mitigation.
Is a Captive Insurance Company Right for Your Business?
If you are a principal in a closely-held business, a captive insurance company may be an excellent instrument for you. Don’t just wonder, what is a captive insurance company? Consult an insurance professional or lawyer today to find out more about this option for your company!