Captive Insurance: Your Own Insurance Company
Tax-Advantaged Risk Management
Captive insurance lets you pay tax-deductible premiums to your own insurance company. Learn how 831(b) captives work and whether they're right for your business.
- Captive insurance allows your business to pay tax-deductible premiums to your own insurance company
- 831(b) micro-captives are taxed only on investment income - underwriting profits accumulate tax-advantaged
- Captives can cover hard-to-insure risks: reputation damage, cyber liability, supply chain disruption, key customer loss
- Formation requires legitimate business purpose - IRS scrutinizes captives without substance or real claims
- Family-owned captives provide wealth transfer opportunities while delivering real insurance coverage
The Opportunity
Why Captive Insurance Matters
Tax-Deductible Premiums to Your Own Company
Premiums paid to a properly structured captive insurance company are tax-deductible to the operating business, just like premiums paid to commercial insurers. This creates a legitimate way to move profits from the operating company to the captive, where they can grow in a tax-advantaged environment.
831(b) Micro-Captive Election
Under IRC Section 831(b), captive insurance companies with up to $2.65M (2024) in annual premiums can elect to be taxed only on investment income, not underwriting income. This means premium income is essentially tax-free as long as it remains in the captive for insurance purposes.
Coverage for Uninsurable or Expensive Risks
Captives excel at covering risks that commercial markets won't insure or price prohibitively: reputation damage, supply chain disruption, key customer loss, regulatory changes, cyber events, and specialized industry risks. You design coverage that matches your actual risk profile.
Asset Protection and Wealth Transfer
Captive insurance companies can be owned by family members or trusts, creating opportunities for wealth transfer. Properly structured, the captive builds value outside the operating business owner's estate while providing legitimate insurance coverage to the operating company.
Implementation
Proven Strategies
831(b) Micro-Captive for Small Businesses
Form a captive insurance company electing 831(b) status. Pay deductible premiums from operating company (up to $2.65M annually in 2024) for legitimate business risks. Captive is taxed only on investment income. Underwriting profits accumulate tax-advantaged. After years of good experience, distribute accumulated profits.
Operating company pays $500K annual premium to captive for cyber liability, reputation risk, and supply chain coverage. Premium is deductible to operating company. Captive pays $100K in claims, invests remainder. Over 10 years: $5M in premiums, $3M in claims, $2M accumulated in captive (plus investment growth).
Group Captive for Risk Sharing
Join a group captive with other businesses in your industry. Pool premiums for common risks. Benefits of captive ownership without the complexity of forming your own. Share underwriting profits when claims are lower than premiums. Appropriate for businesses with $100K-$500K annual premiums.
20 construction companies form group captive for workers comp and general liability. Each pays $250K annual premium. Good safety records result in 60% loss ratio. 40% underwriting profit returned to members over time. Lower premiums than commercial market plus profit sharing.
Family-Owned Captive for Wealth Transfer
Structure captive ownership through irrevocable trusts for children or grandchildren. Operating business pays deductible premiums to captive. Captive accumulates wealth outside your estate. Properly structured, this shifts future growth to the next generation while providing legitimate insurance coverage.
Captive owned by dynasty trust for grandchildren. Operating company pays $1M annual premium for 20 years. After claims and expenses, captive accumulates $10M. This $10M is outside your estate, growing for future generations, all while providing legitimate coverage to your business.
Avoid These Pitfalls
Common Mistakes
Abusive Captive Structures
The IRS has designated certain captive arrangements as "transactions of interest" requiring disclosure. Captives with unreasonable premiums, unlikely risks, or circular money flows face IRS challenge. Work only with reputable captive managers who prioritize substance over tax benefits. Audit risk is real.
Inadequate Actuarial Support
Captive premiums must be determined by qualified actuaries based on actual risk analysis. Premiums set without proper actuarial support, or that bear no relationship to actual risks, will be challenged by the IRS. The actuary is your first line of defense in an audit.
No Real Insurance Function
Captives must operate as real insurance companies: issue policies, maintain reserves, pay claims, and meet regulatory requirements. A captive that never pays claims, or exists only to generate deductions, is not a real insurance company and will not withstand IRS scrutiny.
Questions
Common Questions
Here are the most common questions we receive about this topic.
Ask Your QuestionReady to Explore Captive Insurance?
Captive insurance is a sophisticated strategy requiring careful planning. Let us help you determine if a captive makes sense for your business.