Captive Insurance: What is It and How It Benefits Businesses

As any responsible business owner would, you surely have at least one insurance policy to cover your unique business risks. It’s highly likely you’re paying another company to provide you with insurance. But did you know there’s another option where you establish your own insurance company to cover your liabilities?

We’re talking about a captive insurance company (CIC). When executed effectively with the help of an 831(b) attorney that can ensure proper compliance to prevent legal risks, forming your CIC comes with several benefits.

Let’s take a closer look at what a captive insurance company is and how it will benefit your business.

First Things First: What is a Captive Insurance Company?

Simply put, a CIC is an insurance company owned by the insured business itself. The CIC is operated as a corporation’s wholly-owned subsidiary that provides risk-mitigation services for the parent company and its other subsidiaries, if any.

You can establish a captive insurance company if you cannot find an insurance provider that can cover your specific business risks. Aside from the insurance benefit, forming your own CIC also comes with other advantages, primarily on the financial side of things.

Top 3 Ways a Captive Insurance Company Benefits Businesses

Three primary ways are forming a captive insurance company can benefit a corporation.

1. A CIC can cover your business’ unique insurance needs

As your enterprise will own the CIC, you can establish it to provide a completely customized insurance policy. This ensures that your business’ unique risks are entirely and exactly covered, no more and no less.

A captive can utilize full freedom when it comes to policy customization, allowing it to tailor the terms and conditions to cover specific insurance requirements. The resulting policy is not only more comprehensive but inherently cost-efficient, too.

Captive insurance could be the best option for businesses whose coverage existing commercial insurance policies do not meet needs.

2. A CIC allows a business to control costs

Traditional commercial insurance companies typically set coverage prices based on industry standards, not on the insured’s loss history or other individual conditions. Because of this, even if a business is essentially lower-risk than others, it is still likely to pay for costly coverage.

In a captive, your business’ loss background and emerging industry trends are heavily considered. As a result, the cost of coverage is reduced. This is also made possible by the fact that you no longer have to deal with an intermediary.

3. A CIC may generate income in the form of tax savings

When you use a CIC, your business can get tax deductions for the insurance premiums you pay toward the captive. It also paves the way for other tax savings opportunities, such as estate and gift tax savings that shareholders can enjoy. There are also additional income tax savings for both the parent company and the CIC.

Making the Most of a Captive Insurance Company: Understand and Comply

Insurance form being presented

Establishing your own captive insurance company comes with all of the responsibilities and requirements related to forming any other kind of business. The CIC needs to be seen as an entity of its own. So, you have to consider the associated operational and administrative costs. More importantly, you need to handle complex compliance issues to ensure that your CIC won’t fall under the scrutiny of the IRS.

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