InKnowVision September 2012 HNW Technical Webinar - Captive Insurance

Technical Webinar

©2012. InKnowVision LLC. All rights reserved. www.inknowvision.com

Captive Insurance Companies

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InKnowVision, LLC

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Benefits

 Wealth Accumulation

 Favorable Tax Treatment

 Minimize/Reduce Insurance Costs

 Customize risk coverage

 Increased cash flow

 Wealth Preservation

 Asset Protection

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Profile Client

 Successful business or profession

 Has uninsured risk

 Has insured risk willing to self insure

 Significant gross revenue - $10M

 Free cash of at least $500k or more


Profile Client

 Developers

 General Contractors

 Subcontractors

 Manufacturers

 Professional Services Firms

 Franchisees

 Restaurant / Hotel Chains

 Physician groups

 Hospitals


Case Study

 Manufacturing company (C Corp)

 $35M sales

 Plants around the world

 300 employees

 Net profit - $4.5M annually

 Insurable risks abound

 Estimated premium to insure all risks totals $2M


Captive Formed

 Captive formed

 Insurance coverage selected and written by captive

 Premium paid $1.2M


Income Tax Year 1

 Deduction to manufacturing company

 Saves approx. $400k in income tax

 Captive makes 831(b) election

 Captive has no taxable income


Income Tax Year 2

 Deduction to manufacturing company

 Saves approx. $400k in income tax

 Captive has some taxable income

Premium is non-taxable (if less than $1.2M

Investment income on reinvested underwriting profit is taxable.


Process - Qualification

 Conversation

 Basic qualification and Risk Analysis

 Phone call with client and advisors

 Cost - Benefit Analysis

 Go-No Go Decision


Process - Implementation

 Engage Manager

 Formation

 Actuarial

 Risk coverage selection

 Premium Payment

 Policy Issue


Process - Time

 Evaluation – 1-2 weeks

 Implementation – 4-6 weeks


Captive Insurance Companies

 Insurance company

 Formed to insure risk

Liability

Operating Risks

Business Risks

Exclusions

Deductibles


Captive Jurisdictions

 Utah
 Nevis

 Nevada
 Anguilla

 Vermont
 Bermuda

 Kentucky

 Delaware

 District of Columbia


Types of Captives

 Pure Captive – Single Family House

 Cell Captive – Apartment Building

Less expensive

 (Revenue Ruling 2008-8)

Uses the 11 or more subsidiary safe harbor (Rev. Rul. 2002-90)

Requires pooling of risk


Types of Captives

 Single Parent Captive

 Group Captive

Homogeneous – same industry

Heterogeneous – multiple industries


Types of Captives

 Foreign corporations taxed as US taxpayer

 Foreign corporation not taxed as US taxpayer

 Domestic companies – US Taxed


Capital Required

 Jurisdiction Requirements
$125k (Cayman)
$100k (Anguilla)
$27k Nevis
$250k+ (Vermont and Nevada)

 Reasonableness and premium requirements
Depends on premiums
History of claims paid


Tax Issues

 Premium Deductibility by US taxpayer

Ordinary and necessary

Real insurance


Real Insurance

 Risk sharing (spread risk over a number of insured)

Harper – 30% OK

Rev. Rul. 2002-89 - 50% OK

Pooling – form of reinsurance
Actual exposure to risk of loss

 Risk shifting – move the risk off of the balance sheet

of the insured


Tax Issues

 Income to the captive

 If captive is a:

Foreign corporation and not a CFC – no US tax
But 4% excise tax if writing domestic business

CFC or 953(d) company – US tax (unless 831(b) election)

Domestic company – US tax (unless 831(b) election)


953(d) Election

 Election to be taxed as a US company

No excise tax on insurance premiums

Can own US real estate

Company files US tax return as if domestic company

Reduced filing requirements

Company must post LOC equal to 10% of gross income or have
assets in the US equal to that amount


831(b) election

 For small insurance companies

Includes captives

 Companies making the election can exclude up to

$1.2M in net premium (premium less underwriting
costs and expenses less losses)

 Must pay tax on investment income


Wealth Transfer

 Consider establishing children or grandchildren’s

trusts as owners

 Underwriting profit passes gift tax and GST tax free

to trust and its beneficiaries.


Distributions from Captives

 Distributions are taxable when paid out from the

captive (pure or cell)
Taxable as dividends

May be a favorable rate

If company is sold then sale proceeds are taxed at capital gains
rates


Planning Idea

 Captives do not have to have one owner

 Part owner by client

 Part owned by trust for kids


Costs

 Pure Captive

$80,000-190,000 in year of formation

$72,000-115,000 in subsequent years

Fee is also related to premium (pool costs)


715 Enterprise Drive
Oak Brook, IL 60523

Questions or Comments?

(630) 596-5090

www.InKnowVision.com

Scott Hamilton, CEO
InKnowVision, LLC
www.inknowvision.com
630-596-5090 x80

All Content Copyright © 2012 InKnowVision, LLC

InKnowVision September 2012 HNW Technical Webinar - Captive Insurance

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InKnowVision September 2012 HNW Technical Webinar - Captive Insurance