Is a Captive Right for You?

Who Should Consider a Captive?
If you are a mature company and are currently paying large insurance premiums, but have a good claim and loss history, good risk management and the ability to finance your own exposures and are looking for a tax deductible premium, consider a Captive.

Series Captives SBUs share the following characteristics:
  • Privately held
  • Higher than average premiums
  • Low losses
  • Strong financials
  • Consistent profitability
  • Higher risk businesses
  • Low frequency, high severity loss
What risks can be insured with a Captive?
Insurance can be purchased for just about any insurable risk. Common risks include, but are not limited to workers’ compensation in excess of liability insurance, loss of primary vendor/supplier, errors and omissions, excess professional liability insurance, loss of business reputation, construction defects, litigation defense, and employment practices.
What other risks are typically insured?
A secondary goal of captive insurance companies is to augment and provide excess coverage, as well as coverage for a host of risks that are self-insured. The most common uninsured risks are deductibles and exclusions within the existing commercial insurance policies, operating risks of the business, including loss of key man or key customers, credit default, warranty, directors and officers, errors and omissions, litigation defense, etc.
How does a Captive help with succession planning?
Through the use of trusts, as well as proper management of the SBU, the SBU may be kept out of the business owner's estate for federal and state inheritance tax purposes and gives the business owner greater asset protection than if the SBU was owned directly by the business owner.
What are the tax benefits to owners of a Captive?
There are some small property and casualty company tax benefits that are of interest to owners of Captive insurance companies. In particular, Sections 501(c) and 831(b) of the Internal Revenue Code (the "IRC") were enacted to reduce the compliance burden on smaller companies that might consider the formation of a Captive. These two codes apply to Captives that are recognized as insurance companies by the Internal Revenue Service (the "IRS").

In addition, premiums paid to the Captive generally are deducted against income by the operating company in the year of payment as a business expense. Moreover, the Captive does not pay income taxes on premiums received so long as proper elections are made and aggregate annual premiums remain under $2.2 million, thereby resulting in an immediate tax deferral of the premiums received (however, investment income earned by the Captive is taxed at the applicable corporate income tax rate). Finally, to the extent available, distributions made by the Captive to its owners are treated as qualified dividends (currently taxed at lower capital gains rates); and the proceeds paid to the Captive owners from the liquidation of the Captive will be treated as long-term capital gains.
What are the liabilities from other SBUs in the Series Captive?
Series LLCs combine the attributes of separate corporations (such as a parent with subsidiaries) and partnerships into one legal entity, allowing each series to function as a separate business and be protected from liability of other series SBUs. The termination or dissolution of one SBU does not affect other SBUs or the Series Captive.


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Call CCS at 412-837-1500.

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