The IRS is looking for economic justification and proper structure of the entity selected to operate a CIC. When you are satisfied that the benefits of operating a captive are worth a deeper analysis, one key question will be, “What type of captive is best for my organization?” As you begin evaluating alternatives, you will quickly discover substantial differences in the various captive types and structures of captives. You’ll also notice that these differences have a substantial impact on the captive owner’s financials. For that reason, your CFO, attorney and tax advisor will be critical members of the team that evaluates the efficacy of captive formation. In particular, a key area of focus will be the tax implications of operating a captive. While tax considerations alone should never drive a captive-formation decision, they can’t be ignored and almost always play an important role in structure decisions. Main organizational types In most cases, when a captive insurance company is formed in a U.S. domicile, it is organized as a stock, mutual, limited liability, or reciprocal company. Captives formed offshore are most often stock or mutual companies. A stock insurer is an incorporated organization that issues and sells stock to raise capital.   Read more…

There is little question that the tax implications of owning and operating a captive insurance company will be significant. For most organizations, the decision to insure through a captive versus a combination of traditional insurance and self-insurance is significantly influenced by tax implications. Many organizations first discover this difference in tax impact from a captive promoter—especially when the tax impact is significant in a way that is beneficial to the potential captive owner. However, if your only motive in forming a captive is to gain some tax advantage, you would be well advised to reconsider. must pay claims if they are incurred, and so on. If, however, your operation is little more than a shell organization designed to provide predictable tax deductions, you should plan on an expensive and uncomfortable series of interactions with the regulators. If you ever receive different advice than this, please get a second opinion before making any commitments. Assuming an organization decides to pursue a captive because operating a legitimate insurance company makes good business sense, the organization has passed the first hurdle to deductibility: a valid purpose for existence. If a captive exists for no other valid purpose than tax benefits, then no other   Read more…

A captive insurer (or “captive”) is a special-purpose insurance company formed primarily to underwrite the risks of its parent or affiliated groups. It is quite similar to a traditional, commercial insurance company in that it is licensed as an insurance company, it sets insurance-premium rates for the risks it chooses to underwrite, writes policies for the risks it insures, collects premiums and pays out claims made against those policies. The biggest difference between a captive insurer and a commercial insurance company is that a captive cannot sell insurance to the general public. It can only underwrite the risks of its parent organization or related entities. Another key difference is that the regulations governing captive insurance companies are typically less onerous than those regulations governing traditional commercial carriers. At its most basic level a “pure” captive works like this: A corporation with one or more subsidiaries sets up a captive insurance company as a wholly owned subsidiary. The captive is capitalized and domiciled in a jurisdiction with captive-enabling legislation which allows the captive to operate as a licensed insurer. The parent identifies the risks of its subsidiaries that it wants the captive to underwrite. The captive evaluates the risks, writes policies,   Read more…