Captive Insurance

I get asked about captive insurance companies all the time. This can be a great option to add to your practice if done the right way.

So let’s start off with a quick overview. 

First, a captive is a property and casualty insurance company. Think of it as your own personal State Farm. 

Let’s just say I go to State Farm as an insurance agent and I tell them, “I want reputation risk insurance.” I would expect them to look at me like I’m crazy! Fact of the matter is, they don’t offer this. They offer home insurance, life insurance and great commercials… but not reputation risk insurance.

Does this make reputation risk insurance any less viable? The answer: NO! 

It’s so important as an insurance agent to have reputation risk insurance. Think about it, reputation is everything! So, if I have that 8-31-B I could have the captive write the policy to me while I make payments to the 8-31-B, and guess what? Those payments are DEDUCTIBLE… ah, my favorite word. 

Now, of course, the captive’s sole reason of existence should NOT be taxes. It should be for risk management or, in this case, alternative risk management.

I recommend using a high quality administrative company and get a third party risk management study, captive insurance companies can be incredible planning opportunities. 

BUT BE CAREFUL!

There’s a couple things you need to be aware of. 

First, do NOT use it to buy tax deductible life insurance – it’s not designed for that. It’s an insurance company, a property and casualty insurance company, NOT an opportunity to buy life insurance. 

Second, the IRS recently sent out soft letters (inquiries) to people who already have captives. These letters go into what they’ve done, their structure etc. Now, this doesn’t mean they’re not viable. It actually is in the tax code 8-31-B. Just be careful, because everyone who is involved in a captive is considered a material advisor. 

All that to say, do it for the right reasons. You’ll reap the benefits of tax breaks, just make sure you use a high quality administrative company. If you do this, captives will be a fantastic addition to your practice.