1. BROOKFIELD
INSURANCE PARNTERS
“The Trusted Partner to Insurance and Financial Professionals”
Captive Insurance Companies: A Creative Solution to Accomplish Two Needs
What is a Captive?
A Captive is a closely held insurance company established to insure the risks of its parent company. You are the owner,
you control it and you can profit from it.
Benefits of Owning a Captive Insurance Company
1. Cost Stabilization
Captives are often formed by insured’s that have grown tired of paying increased rates of the retail insurance
market. Bypassing this retail market can lead to cost savings through the elimination or reduction of profit loads,
broker commissions, and administrative costs.
2. Profit and Investment Income from Underwriting
Premiums paid into the captive can be invested and can increase surplus. If the captive has positive claims
experience it stands to generate tremendous underwriting profit for the captive owners.
3. Provide Coverage not otherwise available
Captives can provide coverage for a unique or specific risk that would not otherwise be transferable in the
traditional insurance market.
4. Estate Planning Opportunities
Ownership of a captive can be held directly by the heirs of the owners of the parent company. To the extent that
the captive has positive claims experience, the value of the captive will increase. Since the growth is outside the
estate, there is a net wealth transfer without gift or estate taxes.
Plan Comparison Retail Insurance Self Insurance Captive Insurance
Lower Insurance Cost No Yes Yes
Provides Risk Yes No Yes
Protection
Tax Deductible Yes No Yes
Premiums
Design Flexibility No Yes Yes
Claims Control No No Yes
Today, there are more than 5,000 captives worldwide, and some companies we use every day, such as Verizon, and UPS
utilize Captive Insurance Companies.

2. Where are the life insurance opportunities?
The purchase of life insurance, in and of itself, is not a valid reason to create a captive. However, once a captive has been
properly established and capitalized, it may be possible to use some of the reserves and profits to purchase life insurance.
As with any business, there are needs to purchase life insurance, and there may be reasons for a captive to purchase and
own life insurance. Death benefit needs could include key person coverage or stock redemption coverage.
A captive is required to maintain adequate reserves in order to be able to pay any property and casualty claims. Any
reserves that they set aside and invest in a taxable investment will likely create investment income that may be subject to
corporate income tax.
Max-funding a cash value life insurance policy can be a way to set aside some funds on a tax-deferred basis to help meet
reserve needs.
Another use of captive funds is to assist one of the shareholders with estate planning. The captive could use a split dollar
or loan arrangement to pay for premiums for a policy owned by a trust.
Although there are some financial underwriting limitations in that limit the amount of coverage a captive can purchase, it
may be wise for a captive to use a small portion of the assets to purchase life insurance. The use of High Early Cash Value
insurance policies and split dollar/loan arrangements allow the captive to have the limited ability to access its interest in
the policy when needed.
Case Study:
Mr. Johnson is the owner of retail and commercial investment property. He currently owns 18 LLC’s holding $36,000,000
in property. Mr. Johnson currently insures his properties through traditional markets, but has numerous exclusions that
subject him to exposure and risk. Mr. Johnson is also looking for a way to reduce tax on the profits of his properties.
By setting up a captive insurance company, Mr. Johnson can write insurance to cover their uninsured risk and take a
deduction for premiums paid into the captive.
Between the 18 LLC’s, Mr. Johnson is able to fund $1,200,000 of premium into his Captive. By making the 831(b)
election, the captive does not have to pay tax on the income it receives. Under current tax law, when the clients dissolve
the captive the money will be taxed at capital gains rates as opposed to ordinary income.
By setting up a Split Dollar Arrangement with the Captive, Mr. Johnson is able to purchase the life insurance he needs to
equalize his estate to his heirs.
By doing this, Mr. Johnson is responsible for the reportable economic benefit of the insurance, which is a much lower
premium than term insurance premiums.
For Questions on the Technical and Practical Aspects of this Concept, please contact:
Bradford J. Kadelski
President/Managing Partner
Brookfield Insurance Partners
www.brookfieldpartners.com
(866) 639-0443