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Captive Insurance Companies


Typically business owners buy insurance or self-insure (i.e. bear the risk of loss). If there is insurance available to cover a specific risk of loss that could happen in the normal course of business, and it is available for a reasonable price, then the business owner will typically buy that insurance. If insurance is not available or is too expensive, then the business owner has little choice but to self-insure. This self-insurance requires the owner to pay tax on profits and then set aside money, after tax, to cover potential future losses.

What risks are you self-insuring?

The fact is that most risks are self-insured. Business owners do not buy insurance for legal costs of disputes, loss of key employees, loss of key customers, professional fees related to an IRS audit, loss of franchise rights, weather related business disruptions, adverse changes in government regulations, ransom for an employee or owner who is kidnaped, and probably hundreds of other potential risks of loss. Think carefully about risk exposure and check your commercial policies. You are very likely practically guaranteed to find that there are dangerous risks for which you have no (or inadequate) coverage.

What is a captive insurance company (CIC)?

A CIC is an insurance company that insures the risks of a single company (single member CIC) or a small group of companies (group or cell captives). The owners of the CIC are usually the owners of the companies being insured by the CIC, hence the name “captive”. However, the CIC can be owned by other people or trusts to accomplish estate planning and asset protection goals as well.  A CIC is a real insurance company licensed in a jurisdiction (called a “domicile”) that is favorable to the regulation and expense of operating a CIC, such as North Carolina. Choosing the proper or best domicile is an important objective of the recommended feasability study. (Note – there is no special tax benefit for the CIC being outside of the United States. The CIC will be subject to US tax law.)

What is the financial benefit of having a CIC?

The CIC can sell insurance to the owner’s operating business to cover its risks that are normally uninsured, or too expensive to insure. In some circumstances it may also make sense to replace some of the insurance that the operating business normally purchases from a public insurance company. The premium paid to the CIC for that insurance is completely deductible to the operating company, reducing the tax owed by the business owner. Then, in the type of CIC that we generally recommend, the CIC does not have to pay tax on the premium received from the operating company.  This is neither magic nor is it suspicious. Congress has specifically exempted these special “small” insurance companies from paying tax on the premium collected (maximum of $1,200,000 per year). The CIC will have to pay tax on the investment income earned on the money accumulated in the CIC. Example – If the combined state and federal tax rate on profits is 45% then a $1,200,000 deduction reduces tax liability by $540,000. If this is a cell captive and each member owns 25% and can pay $300,000 in premiums, then each member’s operating company will reduce tax liability by $135,000. (Note – a 45% combined tax rate is used here as an assumption. It could be a little lower in North Carolina if none of the profits are being taxed as earned income and it could be a little higher if employment taxes are being paid on profits.) Also, this does not take into account the fact that income taxes are almost certain to increase in the future as our massive national debt is repaid.

Where is the CIC’s money?

The CIC’s assets are invested wherever and however the shareholders decide to invest it, provided the choice of investments is permitted by the domicile’s regulations (another factor in domicile choice). That can be at the local bank, a local financial advisor, or anywhere else in the world that makes sense for the asset allocation preferred by the shareholders.

How do I get money out of the CIC?

First, if there is a loss by the operating company that is covered by any policy issued by the CIC , then the operating company is entitled to payment under the policy. Second, since this is untaxed money, this should not be the first place you go for funds. However, when the time comes, distributions from the CIC are taxed as qualified dividends and if the CIC is dissolved the gain is taxed as long term capital gains (assuming the CIC has been in place for more than a year). Rates on both qualified dividends and long-term capital gains are currently 15%. There are some other methods of reducing the tax on the liquidation of the CIC but that discussion is beyond the scope of this introduction.

How much does a CIC Cost?

A CIC is a real insurance company. The initial setup of the company involves the legal work in forming the company and drafting the legal documents that control the CIC’s operations (and interaction between shareholders of a multi-member CIC); the legal approval of the company and its shareholders by the licensing jurisdiction (called due diligence); underwriting, actuaries, and other policy issuing costs for the first year’s policies; feasibility study; business plan; and a number of details required to get a brand new insurance company off the ground.

For a pure captive, this initial setup cost is typically $65,000 – $70,000. Then, annual costs are about $40,000-$50,000 a year for accounting, annual fees to the domicile government, and expenses related to issuing insurance policies each year. In practical terms, that is $65,000 – $70,000 to save $540,000 in taxes. (That this 12% of initial expenses on the high end of the estimate to save 45% on current year taxes and then 9% in annual expenses to save 45% on  urrent year taxes.)

For a cell captive the complexity of the legal agreements is greater, the shareholder due diligence is multiplied by the number of shareholders, and each policy still requires individual underwriting and actuary costs. The result is that a 4 member CIC would cost approximately $85,000 – $100,000 to start (depending on the time each person takes to complete due diligence, how much discussion and planning is required to bring the clients to the point of decision, and then how many policies need to be issued the first year). Costs for a cell captive are typically much less at $35,000-$50,000 per year. The annual costs in a multi-member CIC are also more since there is interaction and planning with multiple shareholders, multiple insurance policies, and increased accounting and reporting requirements caused by multiple members. However, as with the initial costs, there are economies of scale and the annual costs are not simply multiplied by the number of members. Annual costs for a 4 member multi-member CIC would be approximately $65,000 – $75,000 per year and would depend significantly upon how much hand-holding shareholders required and how many polices are issues (the Shareholder Agreement can be drafted to allocate costs to the members that have more polices and require more resources). In practical terms, that is $21,500 – $25,000 (initial costs divided by 4) to save $135,000 in taxes. (That this 18.5% of initial expenses on the high end of the estimate to save 45% on current year taxes and then 13.9% in annual expenses on the high end of the estimate to save 45% on current year taxes).


The amount of total initial capitalization can vary wildly by domicile. But note this- capitalization is not a “cost” since the capital used is simply shifted from the shareholder’s personal funds into the CIC investment account.


For an operating business that self-insures many risks every day, a Captive Insurance Company can address these risks in a manner that saves substantial income taxes and adds to the bottom line. If you are interested in learning whether this planning can be beneficial to your company, then please contact us.