The Basics on Captive Insurance

Insurance is a pretty straightforward concept. It is a form of risk management, protecting the policyholder from financial loss. But if you have heard of captive insurance and 831(b) compliance issues, you might be a bit confused. Here is a quick rundown on what it is and how it can benefit you.

What is Captive Insurance?

An insurance company controlled and owned by the insured individuals is a captive insurer. However, that still does not help differentiate it from a mutual insurance company. A mutual insurance company is controlled and owned by the policyholders. But in this case, policyholders may not exercise full control over the company. They may have the right to vote on the board of directors, but once their insurance ceases, their ownership status will end as well.

Any insured person that buys captive insurance must be willing to invest their resources. They place their own capital at risk because they are essentially making an insurance company. It is different from the traditional and regulated commercial insurance marketplace. Captive insurers have less capital compared to commercial insurers. Instead of solely paying their premiums, people who choose captive insurance also get to reap the benefits from their risks.

What are the Kinds of Captives?

insurance agent talking to coupleThere are two main groups for captive insurance companies. The first is pure captives, which means the company only insures the risks of the owners. Often, “pure captive” companies consist of a group of individuals who belong in the same industry or have homogeneous risk, which makes their group-buying and risk management more efficient.

The other group is called sponsored captives or “non-affiliated” or “non-owned” captives. It shares many similar aspects with the pure captive insurer. But the sponsored captive is not made by the insureds or participates, and it doesn’t necessarily pool the insured’s risks.

What are the Benefits of Captive Insurance?

A good example of a benefit you can get is broader coverage. Insurance products available in the commercial market may not match your needs or are extremely expensive. The captive insurer can offer coverage for risks to fit the needs of each of the insureds, given that the coverage follows the guidelines.

As the captive insurance matures, pricing stability follows as well. There are tons of ways you can save on taxes, which can include real estate and gift tax savings for shareholders, along with income tax savings for the parent and the captive. You can protect your assets from claims from personal creditors and businesses. Plus, you can insure risks that would typically be uninsurable.

What is Captive Insurance Compliance?

Captive insurance companies must follow the requirements given by the IRS. Simply forgetting to file a form can lead to huge penalties. It would be wise to make sure you follow all the given guidelines and regulations before the IRS performs an audit. Find someone who knows about captive insurance compliance to avoid any legal risks.

Captive insurance can be a fantastic way to get savings and better coverage. Just make sure you brush up on the basics before you dive into it.

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