A “Captive” Insurance Program is a way of owning the premiums you pay for insurance and also owning the profits your premiums make. Sometimes, a captive insurance program can exist in a legal tax-free environment. So, if you have premiums that are over $250,000, and your losses have been low, you deserve to have the profits from your premiums. Why give your premium profits, year after year to the stockholders of a large insurance company? Many times the profits can be returned to the insured as capital gains instead of ordinary income.
There are many variations of Captive insurance programs. Some require capital contributions in addition to payment of premiums, and others do not. Captive programs can be applied to most types of insurance coverage.
The bottom line on Captive Insurance is that it is a way to increase your bottom line from your insurance premiums.
Captives, Large Deductibles and Self Insured Retentions
Business ownership is filled with a variety of risks, both known and unknown. Prudent business owners employ various forms of insurance to protect against financial loss. In a traditional commercial insurance arrangement, a business owner pays premiums to a third-party insurance company, effectively transferring some or all the business’s risk. However, because commercial insurance companies make profits by charging premiums in excess of expected losses and they retain the entirety of the premium whether the customer has claims or not, sometimes self-insurance or captive insurance is a more logical and economical approach.
Self-insurance is a risk retention mechanism in which, rather than contractually transferring risk to a third party as it would in a traditional commercial insurance arrangement, a company sets aside money to fund future losses. For smaller or more predictable potential claims, self-insuring can improve a company’s operating profits by reducing premium costs.
The other type of self-insurance that is available to most business owners, regardless of the size of their enterprise, that offers all the benefits of a fully self-funded plan and also provides additional incentives and risk management. This type of self-insurance is called captive insurance. Like fully self-funded insurance, captive insurance is a risk mitigation strategy whereby a company insures itself against future losses. There are several different kinds of captive insurance arrangements that businesses can use to optimize their risk management strategy, depending on their size and the risks that they are looking to insure.
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