Captive Insurance Company

1. BUSINESS & TAX PLANNING
WITH CAPTIVE INSURANCE
COMPANIES
AUGUST 10, 2009
J. SCOT KIRKPATRICK, ESQ. THOMAS E. JONES, JR., ESQ.
(404) 658-5421 (404) 658-5432
scot.kirkpatrick@chamberlainlaw.com t.jones@chamberlainlaw.com
PRIVILEGED AND CONFIDENTIAL © 2009 Chamberlain Hrdlicka

2. WHAT IS A CAPTIVE INSURANCE
COMPANY (“CIC”)?
• A Captive Insurance Company is an insurance company owned and
controlled by you, your business, or a group of business with which
you are affiliated.
• A CIC provides self-insurance in a way that is approved by the IRS.
• A CIC can provide coverage against numerous types of liabilities,
including liabilities that you currently insure against as well as those
that you do not insure against.
• A CIC can provide substantial cost savings, tax and other benefits.
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3. WHO CAN BENEFIT FROM A CIC?
• Profitable businesses.
• Business with typically uninsured risks.
• Businesses willing to undertake the cost and responsibilities of
forming and administering a CIC.
• Businesses with a history of low insured losses.
• Businesses willing to take the risk that losses may exceed
expectations in exchange for cost savings and tax benefits.
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4. HOW IS A CIC FORMED?
• A new corporation is formed in a favorable jurisdiction.
• The CIC is usually an “affiliate” of the business.
– Alternatively, multiple businesses may set up a “Group” CIC.
• The CIC obtains a captive license in its state of formation.
• The amount of capital required is driven by insurance regulations.
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5. ILLUSTRATION OF CIC STRUCTURE
Owners Owners
Premiums
Captive Insurance
Business
Company
Investments
The owners of each company are often the same, but for business, estate and asset
protection purposes may be different. Trusts set up by the Business owners are often
the owners of the CIC.
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6. HOW DOES A CIC OPERATE?
• The CIC writes policies for the Business insuring appropriate risks.
• The Business pays premiums to the CIC.
• The CIC uses the premiums it receives to pay for operating expenses
and to purchase investments.
• The CIC pays claims to the Business.
• A management company is generally used to conduct the daily
operations of the CIC.
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7. HOW IS A CIC REGULATED?
• The Department of Insurance of the state in which the CIC is formed
will periodically audit the CIC’s books and records.
• An auditing firm approved by the state must audit the CIC’s books
and records annually.
• An actuarial firm approved by the state must certify the CIC’s losses
on an annual basis.
• The CIC’s Board of Directors must have annual meetings.
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8. WHAT ARE THE TAX BENEFITS OF A
CIC?
• The premiums paid to the CIC by the Business are deductible.
• Up to $1.2 million of the premiums received by the CIC per year are
not taxed to the CIC.
• Cash in the CIC may be paid to the owners of the CIC as dividends
or as a return of capital at capital gains rates.
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9. TAX BENEFITS VS. COSTS
Tax Benefits
Assuming 45% combined state & federal corporate income tax rate:
$1.2 million x 45% = $540,000 maximum annual savings
Costs
Set up and annual administrative costs will vary depending on complexity and other
facts. Set up costs usually run from $60,000 to $120,000 and annual administration
usually runs from $20,000 to $50,000.
Year Tax Savings Estimated Costs Net Tax Savings
1 $540,000 $125,000 $415,000
2 $540,000 $30,000 $510,000
3 $540,000 $30,000 $510,000
4 $540,000 $30,000 $510,000
5 $540,000 $30,000 $510,000
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10. WHAT ARE THE OTHER BENEFITS OF
A CIC?
• Cost savings on insurance premiums for the Business.
• The CIC can potentially earn investment income that would
otherwise be paid to an insurance company.
• Greater flexibility for structuring insurance policy terms.
• The CIC provides a layer of protection against creditors.
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11. EXIT STRATEGIES: HOW DOES AN
OWNER GET OUT OF A CIC?
There are a variety of favorable exit strategies:
• Give it Away (during life or at death)
• Sell
• Merge
• Liquidate
• Other
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12. DISCLAIMERS
• The information contained in this presentation is for illustration purposes
only and not intended to be formal tax or legal advice.
• The rules imposed by IRS Circular 230 require us to state that, unless it is
expressly stated, any opinions expressed with respect to a significant tax
issue are not intended or written by the practitioner to be used, and
cannot be used by the recipient, for the purpose of avoiding penalties that
may be imposed on the recipient or any other person who may examine
this correspondence in connection with a Federal tax matter.
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