We speak to many groups of business owners and professionals about asset
protection and tax-favored wealth planning, and we are often asked about
international captive insurance companies. ‘Captives’ or tax-exempt
closely held insurance companies (CICs) are useful for both asset protection
and tax deferral – provided they are suited to your economic needs,
and you qualify for their considerable tax benefits. The CIC is a legitimate
insurance company. It is licensed to write insurance in the U.S. and registered
with the IRS. Though based in international jurisdictions, international
CICs sell more than a third of the total commercial insurance sold within
the United States. Many Fortune 500 companies have long used CICs to protect
their excess cash, to gain tax advantages, and to lower their own insurance
costs. Now individuals, smaller business owners and professionals also
take advantage of CICs by setting up their own.
By owning your own CIC, you can insure all or a portion of your business
or professional practice from significant risks – such as malpractice
or other liabilities or losses for which you would typically carry insurance.
By insuring yourself through your own CIC, you get a present year tax
deduction on the premiums and you can pay any claims with pre-tax dollars
out of the CIC’s loss reserves. Your CIC can insure low liability
risks, or your CIC can transfer risk to another reinsurer. You would then
have little economic risk while enjoying significant tax benefits. Whether
you own a CIC as an individual professional, business owner or member
of a group you can take a significant deduction each year and grow your
funds in the CIC completely tax-free. You can later reclaim the funds
and pay only long-term capital gains tax. This three-tier tax advantage
is unavailable through pensions, IRAs or other retirement plans.
In addition to its tax benefits, the CIC offers superb asset protection.
Your CIC can supplement your existing liability policy. This ‘excess’
malpractice protection also gives you the security that you won’t
be wiped out by a lawsuit in excess of your present coverage. Also, the
pre-tax premiums paid to your own CIC are protected from the creditors
of your business or professional practice. You accomplish all this without
losing control of your international funds. If you own a business or professional
practice with $400,000 or more in annual profits, consider forming your
own captive insurance company.