Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.
Question: What is a captive insurance company, and what does it have to do with life insurance?
Answer: Captive insurance companies (CICs) are fairly complex to set up and maintain. However, they make sense in certain limited circumstances.
It is impossible to describe all the nuances of captives in this small space. We recommend that you visit this website for more information.
The short version of the story on CICs is that companies that can’t buy insurance for all their risks. Those companies can create their own self-funded CIC to cover the uninsured risks. If they play within the rules, the main operating company can deduct the actuarially reasonable premiums it pays to the captive.
The captive doesn’t have to include most of the premiums in any kind of taxable income, because it has to reserve for the risks the operating company is paying to insure.
Some professionals have suggested that the captive can decide to invest the premiums it collects in tax-advantaged vehicles like life insurance. The further suggest that CIC ownership of life insurance can provide certain tax advantages.
Here’s an example. Say that the operating company decides to form a CIC. Say also that the captive is owned by the children of an owner of the main operating company. The captive decides to buy insurance on the life of the owner of the main operating company.
Looking at that example in a certain way, it’s kind of like paying for life insurance premium on a tax-deductible basis without any gift tax consequences to the children.
CICs aren’t for everyone. A captive’s expensive to set up and maintain, and not every business is a candidate for a captive. The best candidate is a main operating company making millions in profit, and it has real uncovered risks that actuarially warrant the payment of significant premiums.
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