Captive insurance firms minimize taxes, create wealth and boost insurance cover for business owners paying taxes in the United States. In certain aspects, a captive insurance company (CIC) is identical to any other insurance company. It is referred to as “captive” because it provides one or more associated operating companies with insurance in general. For captive insurance, premiums charged by a corporation are kept instead of being paid to an outsider in the same “economic family”. Learn more about Miller Hanover Insurance, Hanover.
Two primary tax advantages allow a system involving a CIC to effectively create wealth: (1) insurance premiums charged to the CIC by a corporation are tax deductible; and (2) the CIC earns up to $1.2 million in annual income-tax-free premium payments under IRC § 831(b). In other terms, a company owner may pass taxable profits into a low-tax captive insurer from an operating business. 831(b) of the CIC only pays tax on revenue from its assets. Additional tax efficiency for dividends earned from its corporate stock investments is given by the “dividends received deduction” under IRC § 243.
Starting about 60 years ago, large businesses created the first captive insurance firms to offer insurance that was either too costly or inaccessible in the traditional insurance industry.
Over the years, the steps and processes necessary for the establishment and operation of a CIC by one or more business owners or professionals have been clearly established by a combination of US tax laws, court cases and IRS rulings.
A captive insurance business must meet the conditions of ‘risk shifting’ and ‘risk distribution’ in order to qualify as an insurance company for tax purposes. Via regular CIC training, this is easily accomplished. In fact, the insurance offered by a CIC must be insurance, i.e. a real risk of loss must be transferred from the premium-paying operating undertaking to the risk-insuring CIC.