Captive insurance companies have been in use for decades to assist companies with asset protection. In essence, a captive insurance company is one that is owned by those who are insured by it. The parent company which owns the captive insurance company pays premiums into it, which it can then use to cover risks that may threaten the company.

There are numerous benefits to using captive insurance, but only if it is designed properly. Structuring policies, evaluating risks, and wording agreements are just a few of the issues that need to be handled properly for captive insurance to be truly effective—and to avoid certain legal complications. This requires legal experience, which is where Hart & David comes in.

Asset Protection Benefits

Often, commercial insurance plans will not cover everything that may occur in your company. There may be holes in your coverage, which is why many organizations choose to form captive insurance companies. These companies allow them to have coverage in case of a self-risk or uninsurable event. In addition, that coverage can come at a much lower cost since commercial insurance companies need to designate higher premiums that allow them to reap a profit, whereas captives do not.

Additionally, since most companies have a good idea of what risks they face, they may use captive insurance to cover predictable, easy-to-manage risks while leaving other, more costly events to a more conventional plan. This allows you to profit through a low claims experience as you manage risks effectively.

Tax Benefits

Tax laws permit an annual $1.2 million exemption on premiums within your captive. If the captive is designed well, your company can accumulate a great deal of wealth within it, all of which will be tax free. Since the company also controls captive insurance funds, that money can be highly useful for making investments and in estate planning.

Again, these benefits only come if the captive is structured correctly. Also, the funds need to be handled in a way that is compliant with federal and state regulations. Hart & David can help you structure your captive insurance in a way that will yield the most tax benefits to you.

Legal Considerations

While a captive insurance company provides substantial tax benefits, that must not be considered its primary purpose. Otherwise, the IRS could get involved and your company may face penalties. The captive must have the primary purpose of insuring you against risk, so you need to be able to prove the likelihood of potential claims your captive may need to cover.

Insuring against unlikely claims can cause trouble, so potential claims should be real risks your company faces. This ultimately comes down to structuring the captive, wording policies, and planning for taxes and risk mitigation in a way that is effective.

Hart & David can assist you in structuring a captive insurance company that will help protect assets, reduce expenses, and yield large tax benefits. Our expertise will help you plan how the captive will be used and managed while ensuring that such nuances as policy language, funds transfers, corporate governance, and other matters are effectively planned out. We can also represent you should litigations or disputes occur. To learn more, contact Hart & David today.

Joel J.H. Funk

Joel J.H. Funk

Partner
Jonathan D. Herpy

Jonathan D. Herpy

Partner
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