Captive Insurance 101: What Is It and How Does It Work?

Do you need a way to insure your company while taking maximum advantage of any available tax breaks?

If so, then we’ve got the perfect solution for you: captive insurance. This is a rather unique insurance company setup that has helped many businesses to have better control of their assets in the event that a certain risk materializes.

If you don’t yet know the answers to the questions of what is captive insurance and how it works, you’re in the right place. In this article, we’ll explain the nitty-gritty of this particular insurance format to you.

What is Captive Insurance?

Simply put, captive insurance is when an insurance company is set up and wholly owned by the insured parties. So this particular insurance setup is when the owners of a company are willing to put their assets at risk by creating the captive insurance company.

In a typical insurance structure, the insured policyholders do not own a stake in the company. And even if they do, they have small stakes and are not able to make business decisions for the insurance company.

That is not the case with captive insurance. Policyholders have complete control over the company. There will also generally be a small number of policyholders for each captive insurance company.

Benefits of Captive Insurance

So why would owners want to put their personal assets up for risk with a captive insurance company instead of using a traditional insurance plan?

There are several reasons why one would choose the benefits of a captive insurance program.

First and foremost, captive insurance is not a regulated industry. Because the insured and the insurer are the same party, they can create whatever business relationship they wish.

Regulations in the normal insurance industry are expensive and time-consuming to implement. By not having to abide by typical regulations, the company is able to save cost.

Another primary benefit of captive insurance is the tax break involved. Because insurance premiums are often tax-deductible, this means that the company in question can set up insurance premiums in a way that reduces the company’s overall tax liability. While this also does mean that the money can’t be immediately reinvested into the company, it nevertheless is extremely useful to minimize taxation’s impact.

Last but not least, with a captive insurance company, the party in question can setup whatever risk profile and insurance plan they want to. So if there aren’t any good options on the market that meets their specific criteria, the company can create its own.

Captive Insurance, Made Simple

There you have it. Equipped with this guide to captive insurance, you should now have a better understanding and appreciation for what captive insurance can do for companies. Are you interested in going the captive insurance route? Let us know in the comments below!

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