What the Heck is Captive Insurance?

And how can it save business owners hundreds of thousands of dollars?

I had a wonderful discussion with Ken Huffman, CPA this week on our Maximize Business Value Podcast. We talked about captive insurance and it was exciting! Don’t roll your eyes at me. When I first met Ken, I had the same reaction… business insurance… yawn. But once Ken explained the concept to me, I couldn’t wait to get him on the podcast and to write about it here.

Captive insurance is typically an insurance company that is wholly owned and controlled by the owner(s) of the business it insures. Both the owner and the company benefit from underwriting profits and tax advantages. Captive insurance is real insurance, covers real risks in any business, and integrates with your traditional commercial insurance. The difference between traditional insurance and captive insurance is that the insured put up their own capital through paying premiums but get to keep all those premiums if there are no claims. All risks are covered through reinsurance.

Any insured who purchases captive insurance must be willing and able to invest its own resources. The insured in a captive insurance company not only has ownership in and control of the company but also benefits from its profitability.

The three primary benefits of captive insurance are protection for the business, reduce taxes, and build wealth for the business owners.

Protect the Business

Captive insurance Integrates with traditional commercial insurance and allows the insured great flexibility for coverage that may not be available with traditional insurance. It all starts with an actuarial assessment of the risks in the business to determine the coverage and premium amount. It allows the insured to create custom insurance policies where there may be no other options. 

And, Because the captive insurance company is a separate corporation, it becomes a new asset of the business owner that is creditor proof. 

Decrease Taxes

Captive insurance can decrease taxes and costs, allowing the owner to keep more of what they have earned in their primary business. Premiums paid are tax-deductible for the business and tax-free for the captive insurance company. The profit from the captive insurance company can also be distributed at a lower capital gains tax rate.

So, think about it. A business that generates $1M in pretax profit at a tax rate of 40% pays $400,000 in taxes, leaving $600,000 in after-tax profit for the business owner. If, however, the business owner can pay that $1M in pretax profit to a captive insurance business as a premium, the owner still has control of the whole $1M and ultimately can take distributions from the captive at the currently lower capital gains rate of 20%. [Important side notes: At the time of this writing, the 2020 corporate tax rate is temporarily 21%, and the capital gains rate for 2020 ranges from 0% to 20% depending on many factors.] 

Build Wealth

Captive insurance turns unused premiums into profit. The premiums that are paid to the captive are retained and re-insured by that captive. In addition, the premiums are re-insured guaranteeing a stop loss for the captive in the event of a claim. Because the premiums are re-insured with traditional insurance at a higher deductible, traditional insurance costs are reduced. And, the business can use the captive to set up a new profit center offering a warranty or other insurance program to the insured customers.

Ok - so I have a simple mind, and there is SO much more to this than I can possibly write about here (or frankly understand), so if I’ve at least captured your attention with the points above, you can learn more about captive insurance at the Captive Nation website, or in this great article at captive.com, and you should really listen to that podcast. (You'll see what I'm talking about..exciting!)

So, stop right now, and go read the article and research captive insurance. If you would like to talk to an expert, let me know and I’ll connect you with Ken. 

HOW you are protecting your business and building wealth at the same time? It’s worth at least taking a look, huh? What are you going to do today - to Maximize Business Value? 

And remember, we’re here to help. If we can help you in any way don’t hesitate to reach out! 

#CaptiveInsurance #WealthBuilding #MaximizeBusinessValue

ABOUT TOM BRONSON: 

Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at [email protected] or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).

Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.