While captive insurance companies come in many forms, they also are regulated as such. The Internal Revenue Code (IRC), allows for certain benefits for small non-life companies that qualify under two particular IRC sections: 501(c)15 and 831(b). In fact the benefits under these regulations were revisited by congress with legislation as recently as November of 2004.

Simply stated, a captive insurance company (CIC), is one that purely underwrites the risks of the other companies owned by the same owner(s) as the insurance company. For example, a group of doctors may form a CIC to underwrite tasks associated with their practice, building, or other related businesses they may own. Often times the types of risks should be risks for which ordinary commercial insurance cannot be obtained cheaply or easily. The following are some examples of the types of risks that may be covered by a CIC:

•Administrative Actions Insurance
•Computer Equipment and Data Recovery Insurance
•Loss of Key Employee Insurance
•Employee Practices Liability Insurance
•Executive/Professional Liability Insurance
•Business Income Loss (Contracts)
•Litigation Expense Insurance
•E Commerce Risk Insurance
•Directors and Officers
•Kidnapping and Ransom Insurance
•Sexual Harassment Insurance
•Income Tax Indemnity Insurance
•Deductibles/Gap Coverage

Another significant non-tax benefit of a CIC is that while policy terms may be tailored to meet certain events, the policies can also be crafted to be “litigation expense only” policies, providing only legal fees and litigation costs. This effectively creates a warchest to fight suits with pre-tax funds, while protecting the assets against claim. Premium payments effectively remove or deplete the assets of the business being underwritten or insured. Every dollar of premium paid to the CIC has been moved out of the business and away from creditors of that business. A good captive arrangement can protect profits of the business against loss. Because premium payments are made “for value” it becomes very difficult for any creditor to prove a fraudulent transfer. This leads to the discussion of asset protection and the statutory protection afforded captives. Insurance companies enjoy a very high level of statutory protection for the reserves of the company due to the requirement to protect the policy owners and to insure that the company will always be able to meet its claims responsibilities. Captive insurance companies are no different. Creditors pf the owners are not in the position to force judgments against owners in personal judgments.

When the captive is no longer needed, owners will simply terminate the corporation, distribute the assets, distribute the assets, declare the gains as capital gains, and pay their tax. For this reason, the entity has better tax benefits than those afforded to qualified retirement plans.

Captives formed under 831(b) are structures as “C” corporations for tax purposes. The election to be taxed as an 831(b) on the tax form is quite like making the election to be taxed as an “S” corporation, simple and straightforward. As long as all the insurance company rules have been followed in the formation of the entity, the reporting for tax purposes is very straightforward. Caution must be taken in the process of establishment of the company to insure full compliance with the requirements of insurance company regulations and rules that protect the benefits afforded to insurance companies. It should be noted that formation as well as ongoing administration are somewhat complex and require the need to work with professionals who have experience in this particular section of the code.

In summary, the CIC as a planning tool for the high net worth business owner or professional can be the most powerful piece of the planning pie, if structured properly. Compared to other traditional methods of accumulating wealth, such as qualified retirement plans to name just one, the captive insurance company offers tax benefits, asset protection, wealth accumulation, as well as opportunities to efficiently transfer wealth to next generations far in excess of any other planning methods. Clients that fit the fact pattern metrics should include this approach as one to investigate to determine if it is appropriate for their particular situation.

Article Source: http://articlecrazy.com

Keith L. Mohn, CLU, CHFC is a financial consultant and lecturer, and President of Benefit Solutions Group. LLC, in Keego Harbor, Michigan, a full service financial consulting and planning firm specializing in the advising of high net worth individuals, business owners, and medical professionals since 1983. Mr. Mohn is a charter member of the Wealth Preservation Institute. For more information on Captives and other business planning information, Mr. Mohn can be reached at 248-681-9320, or go to www.benefitsolutionsgroup.biz.

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