Captive insurance is the term used when an insurance company is either wholly or partially owned by the company who uses its services.
There are many reasons why a corporation or other business entity would want to acquire what is known as captive insurance. Here are just some of the benefits that a company can come to expect.
1. The insurance premium that the parent company pays to the captive company can be completely deducted at the end of the fiscal year. This reduces the tax burden that the parent company is responsible for.
2. There are several other opportunities for tax savings including such options as savings on estate taxes and gift taxes for any eligible shareholders in the company and savings on income taxes for both parent company and captive company.
3. Since the captive insurance services are owned by the parent company, the opportunity to increase wealth due to the tax advantages that the tax-preferred vehicle offers is greatly enhanced.
4. Captive insurance offers protection for assets on both a personal and corporate level from creditors filing claims.
5. Some risks are deemed non-insurable by traditional insurance companies. When the parent company owns the captive insurance company, there is no longer a fear of anything not being able to be insured. The captive insurance company will be able to insure virtually anything that the parent company needs to be insured as long as it falls withing predefined legal parameters.
6. The insurance premiums are set by the parent company. This greatly reduces the amount of monthly premiums that must be paid and works to benefit the bottom line of the parent company.
7. Distributions are set at tax rates that are very favorable for the owners of the captive company.
As one can see, there are really no downsides for setting up a captive insurance company to maintain the needs of the corporation and to benefit the shareholders. This is a smart decision to make no matter what the state of the economy is as the benefits are gleaned in any financial environment.