ThomasPatterson   Album Posted Jul.4th, 2022, viewed 347 times

A Brief Introduction to Captive Insurance

Within the last 20 years, many small businesses have begun to insure their particular risks by way of a product called "Captive Insurance." Small captives (also referred to as single-parent captives) are insurance companies established by the owners of closely held businesses looking to insure risks which are either too costly or too hard to insure through the original insurance marketplace. General Liability Insurance
Brad Barros, a professional in the field of captive insurance, explains how "all captives are treated as corporations and must be managed in a way consistent with rules established with the IRS and the appropriate insurance regulator."

Based on Barros, often single parent captives are owned by way of a trust, partnership and other structure established by the premium payer or his family. When properly designed and administered, a company could make tax-deductible premium payments to their related-party insurance company. According to circumstances, underwriting profits, if any, may be paid out to the owners as dividends, and profits from liquidation of the business may be taxed at capital gains.

Premium payers and their captives may garner tax benefits only when the captive operates as a real insurance company. Alternatively, advisers and business owners who use captives as estate planning tools, asset protection vehicles, tax deferral and other benefits not linked to the actual business intent behind an insurance company may face grave regulatory and tax consequences.

Many captive insurance companies tend to be formed by US businesses in jurisdictions outside of the United States. The reason behind this is that foreign jurisdictions offer lower costs and greater flexibility than their US counterparts. Usually, US businesses can use foreign-based insurance companies as long as the jurisdiction meets the insurance regulatory standards required by the Internal Revenue Service (IRS).

There are numerous notable foreign jurisdictions whose insurance regulations are recognized as safe and effective. These include Bermuda and St. Lucia. Bermuda, while more costly than other jurisdictions, is home to many of the largest insurance companies in the world. St. Lucia, a more reasonably priced place for smaller captives, is noteworthy for statutes which are both progressive and compliant. St. Lucia can be acclaimed for recently passing "Incorporated Cell" legislation, modeled after similar statutes in Washington, DC.

Common Captive Insurance Abuses; While captives remain highly beneficial to many businesses, some industry professionals have begun to improperly market and misuse these structures for purposes other than those intended by Congress. The abuses include these