Understanding how captive insurance works for small businesses
Learn what captive insurance is and its importance to small businesses.
What is captive insurance?
Captive insurance is basically an insurance cover created by owners of similar businesses. They come together to form a licensed insurance company that meets their needs.
The company is owned and controlled by its insured therefore making the cover cheaper compared to conventional insurance covers.
This type of insurance can be helpful to owners of small and medium sized enterprises looking to lower operational costs by cutting costs of insurance premiums.
So who can form a captive insurance company?
- Businesses that are actually running (not new businesses).
- Business that are profitable (usually $500000+ but may vary).
- Businesses seeking annual adjustable tax deductions.
- Businesses with under-insured or uninsured risks.
- Businesses seeking asset protection.
- Businesses that can create multiple operating entities or subsidiaries.
That last point is very important because it’s the basis of forming the company. The main purpose of the captive insurance company is to provide cover for its business entities, affiliates or subsidiaries that own it.
Usually if you business does not have smaller entities, the best way forward is looking for similar businesses to yours. Most of the time they too have under-insured or uninsured risks that require captive insurance.
After checking all the boxes, the next important step is understanding the requirements for the operation of the insurance company.
When is a captive considered an insurance company?
- After obtaining an insurance license from relevant jurisdictions.
- When entities making up the company pay reasonable premiums to the captive.
- When the captive insurance company actually starts providing insurance cover.
- When entities involved transfer risks to the captive from conventional insurance companies.
- When 50% of the captive’s revenue is strictly from insurance.
- When the captive accepts and covers risks from multiple subsidiaries or entities.
After the company is formed the owners can now transfer risks to their captive insurance company and say good bye to conventional ones. But what are the benefits of captive companies and are they important?
Benefits of captive insurance companies
- Significant price reduction for premiums.
Small businesses will end up paying less than they usually would with traditional insurance companies - Broader coverage of otherwise uninsured or under insured risks. Businesses can be guaranteed that all their risks that were not covered before will now be covered by the captive.
- Business growth opportunity due to reduced costs.
Since most businesses would have reduced their spending on premiums drastically, there is opportunity to put the money in good use and grow the business. - Tax deductions and other tax saving opportunities.
Not only does your business save on lower premiums, but on tax deductions as well. - Own and control the captive program.
The business that form the captive insurance company are the owners who also control the company. - Wealth accumulation opportunities.
Since the business will be benefiting from tax savings and lower premiums, there’s opportunity to accumulate wealth as well. - Claims process is simple and efficient.
The claims processes are efficient compared to traditional insurance companies since the owners are the insureds.
Conclusion
There are numerous reasons why small and medium size businesses should consider forming captive insurance companies. As the costs of conventional premiums continue to soar beyond what most people can afford, alternative insurance covers seem to be more favorable.
Additionally, in order to properly insure all possible risks that would otherwise be uninsured, captive insurance is the best way and has proven to be a powerful solution.
