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Captive Insurance but Be Careful


     By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

PhoneCall Lance Wallach at (516) 938-5007


Most business owners want to: build wealth and maximize the value of what is left behind for heirs; protect their wealth to insure that what they have spent a lifetime building isn’t eaten away by taxes, inflation and/or the cost of medical care; distribute their wealth so that their loved ones may be taken care of, and see to it that their assets and possessions go where they want them to go in the time frame they want this to happen. This is the essence of estate planning.
Eventually the business owner leaves the business. If a family member or employee can buy the established business, planning needs to be done years in advance for the best possible results.

If an outside buyer is desired, the company should be positioned so that, if a favorable opportunity arises or an unfortunate event occurs, the company is completely ready for transition. In other words, the business should be ready for sale versus up for sale.

Determining the value of a business is an art. There are no fixed rules, just general guidelines. All characteristics of the business must be considered. The value, however, is ultimately what a buyer will pay considering all relevant circumstances and bargaining at arms length. This is referred to as the fair market value.

Non-cash Payment

Today’s would-be sellers are seeing attractive purchase prices offered in currencies other than cash. The purchase might be part cash, and the remainder an unsecured promissory note. But cash is the only sure thing.

Should the business falter, the remainder of the purchase price may evaporate or become subject to litigation. A sale to the highest bidder is not always the most appropriate sale.

Make Plans for the Future

Most small business owners are so busy running the company they fail to plan for the eventual transfer of the business. By not planning, they jeopardize the futures of the business and, possibly, of his or her family. We are often consulted at this time, but, at this point, it is almost too late to help.

Succession and estate planning involves various questions of tax, law and business planning. The business owner(s) should make the final decisions after being provided with various types of information. If planning is done early, the process is not difficult and the results are maximized. No one plans to fail, but many fail to plan.

How to Use a Captive Insurer to Save Money

Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up insurance companies to provide coverage when they think outside insurers are charging too much or coverage is simply unavailable. A small company can also use this as a tax reduction strategy, with the ability to get money back tax free.

Often, they are starting what is called “a captive insurance company”— an insurer founded to write coverage for the company, companies, or people who founded it.

Here’s how a captive insurer usually works. The parent business creates a captive so that it has a self-funded option for buying insurance, whereby the parent business provides the reserves to back the policies. The company then either retains that risk or pays reinsurers to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.

In the event of a loss, the business pays claims from its captive, or the reinsurer pays the captive. A captive insurance company would be an insurance subsidiary that is owned by its parent(s).

The Better Way for Large Tax Deductions

There are a number of significant advantages that may be obtained through sharing a large captive (“Group Captive”) with other companies. The most important is that you can significantly decrease the cost of insurance for your insureds, as compared to a standalone captive, through this arrangement. The second advantage is that Group Captives do not require any capital commitment.

By sharing a large captive you only pay a pro rata fee to cover all General and Administrative expenses of the insurance company. The cost for administration is very low per insured as compared to forming and operating a traditional stand alone captive insurance company. By renting a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires no significant financial commitment beyond the payment of premiums.

Operation of a standalone captive insurance company may not achieve similar cost saving results that a small business could obtain through sharing a large captive. More importantly, group captives require little or no maintenance by the insureds, and can be implemented in a fraction of the time as compared to stand-alone captives.

If you do this correctly, you can reduce insurance costs and obtain a large tax deduction, with the ability to get money back tax free.

The information provided herein is not intended as legal, accounting, financial, or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

Business Succession with a Captive, Be Careful - Slippery Rock Gazette February 17, 2008
Business Succession Planning; Facilitating the Sale of the Business How captive insurers can reduce taxes and insurance costs By Lance Wallach, Industry Consultant

ABOUT THE AUTHOR: Lance Wallach
Lance Wallach speaks and writes extensively about retirement plans, estate planning, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications and was the National Society of Accountants Speaker of the Year.

Copyright Lance Wallach, CLU, CHFC

More information about Lance Wallach, CLU, CHFC


While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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