A captive, or closely held insurance company (CHIC), is a property and casualty insurance company that is owned and controlled by the business owner to provide insurance for other businesses. The business that owns the CHIC pays premiums to it. The CHIC insures the risks of the operating business and, if required, diversifies its risk to satisfy the risk-shifting and risk-distribution requirements of the Internal Revenue Code. While the company is licensed to write insurance to the business owner and is registered with the IRS as a U.S. company, it is typically based in an offshore jurisdiction due to the more advantageous rules regarding capitalization, policy language and speed of formation.
Why Would a CHIC Be Right for You?
How does a CHIC work?
An individual, company or trust sets up and forms an insurance company. Once licensed, the CHIC functions just as most insurance companies do. It can sell insurance coverage (but generally such sales are only to its owners), receive premium dollars and invest them to pay claims and, when needed, approach the reinsurance market to purchase reinsurance to cover losses.
If the insurance claims are low, the CHIC will, over time, accumulate significant money. Depending on the structure of the CHIC, the income will be taxed in various ways during the wealth accumulation phase (as well as the payout phase) to the CHIC owner when money is needed.
Why form your own CHIC?
There are four main reasons:
If your company pays insurance premiums to the captive insurance company, it is generally tax deductible for your business - but the receipt of premium income is tax free to the CHIC. If there are no or few claims against the insurance company, the reserves will accumulate much quicker and there will be a more profitable company. More profits, in turn, could result in greater gain for the shareholder. At the time of retirement, you can close down the insurance company, disburse the accumulated profit and receive such increased value as a long-term capital gain. Currently, long term capital gains are taxed at a maximum federal rate of 20%.