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Captive Strategy - is it Right for You?

Captive insurance companies, or "captives," have been in use since the 1920s and have grown in popularity ever since. Many business owners utilize them, so others may wonder if a captive is right for their organization. With benefits extending beyond the business – to the business owner and their family, as well – we spoke with Rehmann Principal Steve Armstrong about captives and their benefits.

What exactly is a captive?

A captive insurance company (captive) is a risk management financing vehicle. Ownership can vary, but they're typically owned by the owners of the insured company, or a trust for the benefit of the owners or their family for the purpose of self-insuring or self-funding specific risk management exposures. Captives operate under the same rules and guidelines as a traditional insurance company with certain exceptions triggered by annual premiums.

What benefits would a company receive by setting up a captive?

There are a number of benefits. Many businesses purchase insurance from captives to transfer expensive or hard-to-procure insurance coverage. Effective risk management and low losses can ensure lower-than-standard insurance costs. Businesses can also retain more risk through higher deductibles and therefore lower internal expenses using a captive to fund for small losses.

What about for the individual owner of the captive?

For an individual owner, profitable captives return dividends. Depending on the captive structure, dividends are taxed at the capital gains rate, which may be more attractive to shareholders than their income tax rate. Captives can also be part of an individual's estate plan. Any entity can own a captive, including a trust, a family partnership or corporation. This can allow for a transfer of wealth at minimal cost to successive generations.

It does sound like there can be some real benefits here. Are there any downsides?

The cost can be prohibitive for some. Start-up fees can be $75,000, and annual operating fees $50,000. Captive premiums should typically exceed $500,000 for this to be an economically viable option. Not all businesses have the resources for this type of annual investment. However, if it is an economically viable option for your organization, there can be some great returns.

What should an organization do if they're interested in setting up a captive?

Contact an advisor with strong captive experience that can demonstrate audit compliance. Experienced advisors can provide an overview and direction to firms with little or no upfront costs.

Steve Armstrong is a principal at Rehmann. He has extensive experience in developing creative and effective tax strategies that address a multitude of estate, trust and wealth preservation issues. Contact him today at 616.975.4100 or steve.armstrong@rehmann.com.

Published in Business Consulting

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