Being declared “high risk” or faced with fluctuating insurance premiums and a long claims process, many high-net-worth individuals are taking a “fresh look” at captive insurance for their businesses. Not only for coverage flexibility and less hassle but to also save and earn money.
Recommended, in the right circumstances, as an option for advanced tax planning strategies, we’ve compiled information to give you a better understanding of what captive insurance is, and why it might be of benefit.
The “brainchild” of an Ohio insurance broker, Frederic M. Reiss, in the 1950s, the term “captive” was coined to describe an insurance company he helped form to provide coverage solely to its parent company. With regulations making it prohibitively expensive to operate a captive within the United States at that time, offshore financial centers such as Bermuda and other willing nations were needed to establish a captive. Committed to the concept, Reiss worked diligently to gain a “toehold” for captive insurance and eventually became known as “The Father of Captive Insurance.”
Given the off-shore hurdles, it took a while for the captive insurance concept to gain broader acceptance. However, in the midst of a hard-commercial insurance market in the mid-to-late 1980’s (when liability insurance was either unavailable or unaffordable), it started to gain momentum.
Over the past 30 years, there has been significant growth with the Center for Insurance and Policy Research reporting more than 5,000 captives around the world in a variety of industries. More than 1,000 captives are domiciled in the United States after a handful of states revised their regulations to attract captive insurance business.
Why such a significant interest and growth in captive insurance? By providing an option for corporations, groups or individuals to manage risk by underwriting their own insurance, it can allow for more flexible coverage, reduced or steady premiums and an underwriting profit for the insurer. In addition, captive insurance has other benefits such as enhanced investment opportunities, possible tax advantages, secured loan options and more.
Captive Insurance is not for everyone, but it can make sense for companies, groups or wealthy individuals who are interested in managing insurance costs and gaining increased ways to earn profits and grow assets. It’s important to note, captive insurance places the capital of those who are insured at risk. Anyone who purchases captive insurance must have the financial resources and the willingness to invest it into the policy. That’s because they will have control and ownership and earn benefits from its overall profitability.
We recommend anyone considering captive insurance meet with an experienced financial consultant to go over all the benefits of captive insurance, as well as the disadvantages, in order to make an informed decision. If properly executed and meticulously managed, captive insurance can be beneficial to the bottom line.
At Tax Savings Professionals, we’ve worked with thousands of clients to help them craft financial and tax planning strategies over the past 18 years, and we are here to assist you. Give us a call at (772) 257-7888 or click on our contact form today.