What To Know About Captive Insurance

As a business, there are many considerations to keep the company running smoothly. One major consideration revolves around insurance. If you are considering starting one or want to know more about captives, here is a brief overview of what to expect.


Captive insurance companies are owned by their policyholders. Essentially, the company covers the risk often taken on by a traditional insurance company. Not all captives count for accounting and tax purposes because they fail the required risk transfer tests. There are additional requirements to claim the tax benefits of being a captive. Captives and insurance companies are not at odds. Often, they work hand in hand for claim reimbursement.


In order for a captive to replace commercial insurance, the premium must be tax-deductible on federal income taxes by either your client or you. The IRS requires one of two ways for a captive to be counted as an insurance company. The company must have subsidiaries as part of their holding company or insure third-party business that is equal to or half the captive’s total business.


All captives need to be capitalized. For about $250,000, the company can start up a captive. The company needs to employ an actuary, captive manager, consultant and attorneys to create the captive. The larger the group, the more it costs to start. As the owner of the captive, you don’t pay a premium. Instead, you have to have a certain amount set aside to cover the risks of the policyholders. Most companies need a minimum of $3 million set aside for the captive.

If you think having a captive would be in the best interest of your business, speak with a captive management services company to learn more. The benefits may outweigh the risks. Done right, captive insurance can be an effective strategy to cut costs and take control of your business’ risks.