A Brief Introduction to Captive Insurance


Over the past 20 years, many small businesses have begun to protect their risks with a product called “Captive Insurance.” Minor kidnappers (also known as single-parent kidnappers) are insurance companies set up by owners of close-knit businesses who want to protect the most expensive or most difficult risks to secure with the traditional insurance market. Brad Barros, an expert in hostage insurance, explains how “all kidnappers are treated as companies and must be treated in accordance with established rules by the IRS and the appropriate insurance regulator.”

According to Barros, single-parent kidnappers are usually trustees, partnerships or other structures established by a premium payer or his or her family. If properly designed and managed, an entity can make premium taxable payments to their related insurance company. Depending on the circumstances, the down payment, if any, may be paid to the owners as shares, and the proceeds from the liquidation of the company may be taxable.

Premium payers and their captors can receive tax benefits only when the hostage acts as a real insurance company. Alternatively, advisers and business owners who use captors as tools for asset planning, asset protection vehicles, tax deductions or other benefits unrelated to the real purpose of the insurance company’s business may face adverse effects and tax laws.

Many abducted insurance companies are usually set up by US businesses in areas outside the United States. The reason for this is that foreign powers offer lower costs and greater flexibility than their American counterparts. As a rule, US businesses can use foreign-owned insurance companies as long as the authority meets the insurance regulatory standards required by the Internal Revenue Service (IRS).

There are many notable foreign authorities with insurance policies that are considered safe and effective. This includes Bermuda and St. Lucia. Bermuda, though more expensive than other authorities, is home to many of the world’s largest insurance companies. St. Lucia, the most expensive place for young captives, is notable for both evolving and regulatory principles. St. Lucia is also honored with the recently passed law “Incorporated Cell”, enacted by similar laws in Washington, DC.

General Abuse of Captives; While the captives have always been very profitable to many businesses, some industry experts have begun to misappropriate and misuse these structures for purposes other than those intended by Congress. Harassment includes the following:

1. Risk Distribution and Risk Distribution, namely “Bogus Risk Pools”

2. Excessive deductions on arrangements made by the captives; Reassuring insurers with alternative life insurance schemes

3. Improper marketing

4. Consolidation of improper life insurance

Meeting the high standards set by the IRS and local insurance regulators can be a complex and costly proposition and should only be done with the help of a competent and experienced advisor. The benefits of failing to be an insurance company can be very damaging and may include the following penalties:

1. Loss of all deductions on premiums received by the insurance company

2. Loss of all deductions for premium payer

3. Compulsory distribution or liquidation of all assets from an insurance company making additional tax on capital profits or profits

4. Tax mismanagement by the Foreign Direct Company

5. Potential tax management as Personal Foreign Holding Company (PFHC)

6. Potential regulatory fines granted by the insurer

7. Potential penalties and interest imposed by the IRS.

Overall, the tax consequences could be greater than 100% of the captives paid. In addition, attorneys, CPA economic advisers and their clients can be treated as advocates for tax evasion by the IRS, making fines up to $ 100,000 or more per transaction.

Clearly, establishing a hostage insurance company is not something to be taken lightly. It is important that businesses that want to establish a kidnapping business with competent lawyers and accountants have the necessary knowledge and experience to avoid the pitfalls associated with abusive or poorly constructed insurance structures. The general rule of thumb is that a seized insurance product must have a legal perspective covering the key elements of the plan. It is well known that the opinion should be provided by an independent, regional or national law firm.

Risk Abuse and Risk Distribution; The two most important elements of insurance are those of the risk of being transferred from one insured person to another (risk switching) and then risk being placed between a large insured dam (risk distribution). After many years of trial, in 2005 the IRS issued a Revenue Ruling (2005-40) outlining the key elements needed to meet the needs of risk change and distribution.

For those who are self-employed, the use of a hostage building approved by Rev Ruling 2005-40 has two advantages. First, a parent does not have to share risks with other groups. In the 2005-40 regime, the IRS declared that risk could be shared in the same economic family as long as the different supporting companies (required at least seven) were formed for non-tax business reasons, and that the division of these subsidiaries also had a business reason. In addition, “disaster distribution” is provided as long as no under-insurance service provides more than 15% or less than 5% of hostage-held premiums. Second, the special provisions of the insurance law that allow captives to deduct current amounts to estimate future losses.


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