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A Brief Introduction to Captive Insurance

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      July 4, 2022 2:32 PM MDT
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    In the last 20 years, many small businesses have begun to insure their very own risks through a product called "Captive Insurance." Small captives (also known as single-parent captives) are insurance companies established by the owners of closely held businesses looking to insure risks that are either too costly or too hard to insure through the traditional insurance marketplace. Builder’s Risk Insurance Brad Barros, a specialist in the field of captive insurance, explains how "all captives are treated as corporations and must certanly be managed in a technique in keeping with rules established with both the IRS and the correct insurance regulator."

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

    Premium payers and their captives may garner tax benefits only when the captive operates as an actual insurance company. Alternatively, advisers and business owners who use captives as estate planning tools, asset protection vehicles, tax deferral and other benefits not related 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 the United States. The cause of this really is that foreign jurisdictions offer lower costs and greater flexibility than their US counterparts. Usually, US businesses can use foreign-based insurance companies so 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 generally 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, an even more affordable place for smaller captives, is noteworthy for statutes that 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

      July 4, 2022 8:08 AM MDT
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