The captive insurance industry has been around in some form since the 1800s. However, it didn’t gain prominence and “legitimacy” until the health care crisis of the 1970s. This is when a number of associations and industries got together in order to create their own insurance companies. In these captive groupings, clients would not only invest but be able to see and make decisions on the inner workings of their policies and premiums. Today, approximately five thousand captive insurance companies exist.
Many of these require a large investment to make a profit while covering losses and premiums at the same time. Yet, this doesn’t leave you out of the loop when it comes to this type of insurance business. If you have some investment, and the documentation to prove it can be paid, then you may want to consider starting a Micro Captive.
In the simplest terms, micro captives give small and mid-sized businesses the ability to protect themselves from the insurable risks. Under Section 831(b) of the IRS tax code, an entity which describes itself as a micro-captive must have written premiums less than or equal to $2.2 million.
There are a number of advantages to a micro-captive which may make owners of smaller businesses take a second look. Premiums which are paid to the micro-captive by those who both invest and are insured by the organization are deductible as an insurance expense. Because of this, there’s potential to lower standard income incurred by a business. The tax rate for the dividends paid to investors may also be lower since a micro-captive gets taxed on net investment income once expenses directly related to investment income are divided out.
Another recent advantage to setting up a micro-captive comes in the form of estate planning. Currently, captive ownership does not have to mirror ownership of the insured. Thus, the captive can be owned by a trust assigned to children or other heirs. However, it this is the purpose of the micro-captive, owners need to be notified of the risks taken when premiums are paid out or if losses occur.
Should a micro-captive be the way you want to go, start by speaking to organizations like CaptiveResources which have been part of the industry for decades. Then, make sure the investors and funds are ready for you to begin.