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How Does Captive Insurance Work?

The thought of traditional business insurance brings modernized procedures and protocols to mind. Email, couriers, and remote software handle the gambit of forms and so forth.

But business protection formalized back in the 1600s by British Merchants. They saw the need to protect goods they were sailing overseas. That was until captive insurance appeared on the scene in the 1950s here in The States.

Big businesses with peculiar risks realized the need for a larger protective umbrella. These risks made it difficult for them to find and lock down conventional coverage.

That’s still a modern-day struggle and practice.

As your business expands, you’ll need greater protective measures to cover your assets. Find out here about captive insurance and how it differs from traditional means.

What Is Captive Insurance

Captive insurance is a protective measure that provides risk-mitigation to big business. Captive insurance companies provide these services to parent companies or a group of affiliated companies.

The type of company forms as a need when the parent company can’t get standard insurance.

Traditional business coverage comes with limits that don’t often cover certain risks. So to protect itself, a large business may form a captive insurer. Oft times the coverage has a better premium that also comes with tax savings.

How It Works

Captive insurance is also called self-insurance for corporations. Large businesses form what is called a captive-insurance company.

These captive companies fall into two common categories-micro-captive and rent-a-captive.

Micro-captive is the smaller captive with premiums at $2.2 million or less. Rent-a-captive allows companies to access to the captive for a set fee.

In either case, both work to the advantage of large corporations.

Corporations create, control, and manage the captive to cover themselves in hard and soft markets. This captive gives businesses optimum control over cash flow. It provides broader coverage than traditional insurers provide.

It also helps corporations save on the costs of risks management. The bigger plus is that it gives them stable insurance pricing.

Most often these captive insurance companies get set up in foreign companies to save money.

The Deal with Taxes

The parent company holds the responsibility of maintaining the captive premium. To protect itself from tax assessment, captive insurance companies get housed in tax havens.

A tax haven is a country that offers foreign businesses and individuals a tax break. The tax liability is little to none. Plus, these havens limit how much financial information they share with foreign authorities.

The parent company pays the premium overseas but deducts them in the company’s home country. This practice happens when the country the business resides in a higher tax jurisdiction.

The company saves financially. However, in the US, the IRS scrutinizes captive insurance companies who abuse the situation. They consider it tax evasion.

Establish Captive Insurance

There are many considerations and advantages of securing captive insurance. The main benefit is being able to secure coverage not offered in the traditional market place.

If you plan to expand your business into a broader sector, consider creating a captive.

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