By Heath Walters, CPA
In today’s world, running a business isn’t easy. As a financial advisor serving other business owners, you likely have a firsthand view of everything they need to do to find and serve clients, manage employees, and properly handle all the business owner responsibilities they have. In addition to that, business owners need to be thinking of their own long-term business strategy. Yet with the plethora of responsibilities, sometimes those duties fall through the cracks.
One overlooked business strategy is the implementation of captive insurance—a concept that enables successful businesses to establish their proprietary insurance company. A well-structured captive insurance company can offer increased risk protection, potential cost savings, and tax advantages, particularly to firms with significant revenue and net income. While this isn’t right for every company, for some of them this is a very useful and cost-effective business strategy that you can bring to your clients.
What Is Captive Insurance?
Captive insurance is a form of corporate self-insurance, where a company creates its wholly-owned subsidiary known as a captive insurance company. This subsidiary, which is typically set up as a C corporation, writes insurance policies exclusively for the parent company, covering risks that other insurers might not affordably cover or cover at all. Companies use captive insurance to reduce their total risk cost, manage unique vulnerabilities, and free up funds otherwise spent on traditional insurance coverage….while generating tax deductible expenses.
When Does Captive Insurance Make Sense?
While captive insurance offers numerous advantages, it isn’t for every business. Companies best positioned to leverage captive insurance are those with gross revenues exceeding $3,000,000 and a total net income above $360,000, placing them in a 32% tax bracket or higher. Owning your business is of course a prerequisite as well.
Additionally, if you haven’t been satisfied with the lack of choice with your current insurance, then captive insurance can provide more customization to your specific needs. It can also be used to help cover risks not currently covered.
4 Ways Captive Insurance Can Be Used for Your Clients
Now that we’ve discussed what captive insurance is and when it makes sense, let’s delve deeper into its practical applications. Here are four compelling ways captive insurance can benefit your clients, including tailored risk management solutions and potential tax advantages.
1.Increased Risk Protection
Beyond its role as a supplemental safety net, captive insurance also provides an opportunity for firms to insure unique or specific risks that conventional insurers may not cover. This customization of coverage ensures the parent company can navigate business operations with greater confidence and financial assurance.
2.Potential to Lower Costs
A captive insurance company can also help to stabilize or lower insurance costs over time. It allows the parent company to have better control over premiums, deductible levels, and claims settlements, which can ultimately result in significant cost savings. Those cost savings can then free up cash flow to either reinvest in the business or increase profits.
3.Bring Health Insurance In-House
Transitioning to an in-house health insurance plan can offer substantial cost control by directly managing healthcare expenses and reducing administrative overheads associated with external providers. Plus, it allows for the design of an employee health program that aligns more closely with the company’s specific needs and workforce demographics. This is best suited for companies with over 50 employees.
4.Tax-Deductible Expense
Premiums paid into a captive insurance company are often tax-deductible,
so long as certain requirements are met. This scenario can lead to considerable tax savings, which can be redirected into core business operations or strategic growth initiatives. Moreover, the accumulation of these premiums within the captive over time can create a significant financial asset for the company.
Should Your Clients Use a Captive Insurance Policy?
As a financial advisor, your role is pivotal in helping your clients reach their financial goals, especially by helping them navigate these complex decisions. A captive insurance policy can increase cost savings, enhance risk management, provide more tailored coverage, and potentially increase tax benefits. Yet if you aren’t sure these policies are best for your clients, we at
The Walters Institute
can help. With our on-demand tax planning, education, and support, our Family Model Approach, and our expertise in complex tax strategies, we bring together the best in tax planning.If you’d like to learn more about how to work with us,
click here
to schedule a consultation.
About Heath & The Walters Institute
Heath Walters is a strategic tax planning specialist who partners with financial planners to provide behind-the-scenes tax planning expertise for the high-net-worth clients of financial planning firms. With over 20 years of experience as a CPA and Certified Tax Coach, Heath helps financial planning firms set themselves apart to ideal clients through coaching and specialized services that complement traditional wealth management solutions. Heath’s proven process for client acquisition has led to many advisors doubling their book of business in as little as 24 months. Heath has both a bachelor’s degree in accounting and Master of Science in Accounting from Appalachian State University. When he’s not helping financial planners reach their firm’s goals, you can find him spending time with his wife, Nancy, and their three children, Allie, Brianna, and Cooper, or fishing, grilling, and tackling home remodeling projects. He’s an avid Roll Tide fan as well. To learn more about Heath, connect with him on
.
