Friday, July 31, 2020
Insurance companies represent an overwhelming majority of Fortune 500 companies and many of those companies have created wholly-owned insurance companies, referred to as "captives." A captive insurance company is a "closely-held insurance company that does not write policies for the general public. A typical captive insurance company insures risks of the captive owner’s businesses that are otherwise unavailable in traditional insurance markets or that are extremely expensive to obtain."
There are many pros to captives. Since captive insurance companies are a C corporation, they can issue more than once class of stock and can also pay out “qualifying” dividends at preferential income tax rates. Captives also create a safety net for future risks. Further, captives may offer expanded coverage while significantly reducing insurance costs.
Further, a captive "can insure against pandemics and other non-damage related business interruption events, such as loss of rental income and lost profits."
"On an annual basis, the premiums paid to the captive in excess of its claims and operating expenses can be made available for investment or distribution to shareholders. An added benefit of captives is that there may also be opportunities for gift and estate tax savings to the shareholders of captives."
Below is a list of candidates for captives:
- Profitable business entities seeking substantial annual tax deductions.
- Business owners with multiple entities or businesses that can create multiple operating subsidiaries or affiliates.
- Businesses with $1,000,000 or more in annual profits.
- Businesses with uninsured or underinsured risk.
- Business owners interested in personal wealth accumulation and/or estate planning.
See, Eric Allon. Allen Hankins and Jonathan L. Korb, Benefits of captives: They can insure against pandemics, Boston Business Journal, July 28, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.