Using Captive Insurance Companies for Savings

Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.

Often, they are starting what is called a “captive ” – an insurer founded to write coverage for the company, companies or founders.

Here’s how captive insurers work.

The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays re-insures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.

In the event of a loss, the business pays claims from its captive, or the re-insurer pays the captive.

Captives are overseen by corporate boards and, to keep costs low, are often based in places where there is favorable tax treatment and less onerous regulation – such as Bermuda and the Cayman Islands, or U.S states like Vermont and South Carolina.

Captives have become very popular risk financing tools that provide maximum flexibility to any risk financing program. And the additional possibility of adding several types of employee benefits is of further strategic value to the owners of captives.While the employee benefit aspects have not emerged as quickly as had been predicted, there is little doubt that widespread use of captives for employee benefits is just a matter of time. While coverage’s like long term disability and term life insurance typically require Department of Labor approval, other benefit-related coverage’s such as medical stop loss can utilize a captive without the department’s approval.

Additionally, some mid-sized corporate owners also view a captive as an integral part of their asset protection and wealth accumulation plans. The opportunities offered by a captive play a critical role in the strategic planning of many corporations.

A captive would be an insurance subsidiary that is owned by its parent business (es). There are now nearly 5,000 captive insurers worldwide. Over 80 percent of Fortune 500 Companies take advantage of some sort of captive arrangement. Now small companies can also.

By sharing a large captive, participants are insured under group policies, which provide for insurance coverage that recognizes superior claims experience in the form of experience-rated refunds of premiums, and other profit-sharing options made available to the insured.

A true captive insurance arrangement is where a parent company or some companies in the same economic family (related parties), pay a subsidiary or another member of the family, established as a licensed type of , premiums that cover the parent company.

In theory, underwriting profits from the subsidiary are retained by the parent. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the U.S. and in certain parts of the world have adopted a series of laws and regulations that allow small non-life companies, taxed under IRC Section 831(b), or as 831(b) companies.

Try Sharing

There are a number of significant advantages that may be obtained through sharing a large captive with other companies. The most important is that you can significantly decrease the cost of insurance through this arrangement.

The second advantage is that sharing a captive does not require any capital commitment and has very low policy fees. The policy application process is similar to that of any commercial , is relatively straightforward, and aside from an independent actuarial and underwriting review, bears no additional charges.By sharing a captive, you only pay a pro rate fee to cover all general and administrative expenses. The cost for administration is very low per insured (historically under 60 basis points annually). By sharing a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires little or no maintenance by the insured and can be implemented in a fraction of the time required for stand alone captives.

If done correctly, sharing a large captive can yield a small company significant tax and cost savings.

If done incorrectly, the results can be disastrous.

Buyer Beware

Stand alone captives are also likely to draw IRS attention. Another advantage of sharing a captive is that IRS problems are less likely if that path is followed, and they can be entirely eliminated as even a possibility by following the technique of renting a captive, which would involve no ownership interest in the captive on the part of the insured.

Selecting a Life Insurance Plan

When shopping for life insurance, it seems that most people just look at getting the lowest possible rates for the most amount of coverage. There is nothing wrong with that. But why do some companies charge more or much more for what seems the same plan? And if rates are not the same for the same plans with all companies, why do some people want to pay more for the “same” coverage? Are they just not interested in saving money on their life insurance? Do they know something you do not know? Here are some possible reason.


If you are considering a term life insurance plan, then you should also consider the convertibility option. This option simply allows you to convert you term plan to a permanent life insurance without having to go through more medical underwriting. This is important as even though you may feel that term is all you need or can afford today, in 10 years or more, as your health or needs may change, convertibility may be the most important aspect of your policy. If your policy is not convertible, you may lose your coverage when you need it the most. In addition, the ability to convert your policy is not the only important part of this option. What can your policy be converted to? You need to make sure that your term life plan is convertible to a high quality permanent insurance plan. Many companies offer great whole life and universal life options to convert to. Unless, you are absolutely certain that you will only need your plan for a term period (as with some business loans) make sure to request more information on convertibility.

Term Guarantee Period

With term life insurance, you must make check that your rates are guaranteed for the full period. In other words, a ten year terms may be cheaper with company A than company B but company A may have the option to raise rates at some point before the 10 year is over while company B will guarantee rates for the full 10 years. What may have started as the cheapest rate may end up the most expensive.

Customer Service from the Insurance Company and the Agent

We feel that customer service is of prime importance. You need a company that will keep in touch with you regularly and inform you of new programs that may benefit you. They also need to inform you about your policy. Most people get a life insurance plan and file it away and if you would later ask them about the plan they have they either would say that they have no idea or worst, they think they know but are incorrect. A good company will be easily reachable and answer your questions in a simple manner and tell you about your present plan and possible options available.


You may not need them today but who knows what your needs will be tomorrow. Riders can be important from the start or at some point in the future. Make sure that you are ware of which riders are available and whether or not they can be added later. Some may include:

  • Guarantee Insurability Rider (allows you to add insurance later with no or limited underwriting)
  • Waiver of Premiums Rider (pays your premiums in case of disability – read definition carefully)
  • Inflation Rider (adjusts or allows you to adjust your policy face amount based on a percentage you pre-select)
  • Disability Income Rider (pays you a disability benefit in case of a covered disability – read definition carefully)
  • Spouse Rider (allows you to add a spouse to your policy – this may be an inexpensive way to cover a spouse)
  • Child Rider (allows you to add a child to your policy – maximum age is usually 21 to 25)
  • Return of Premiums Rider (returns some or all of the premiums you paid to the insurance company)
  • Accident Rider (pays a benefit in case of accidental death)

Value Added Benefits

Value added benefits that are often free can give your extra protection, discount on products you are already using or even such things as scholarships for children and grandchildren. If you are already paying for some of these benefits with other companies then you can save money as your new life insurance will give them to you for free. When buying certain products or using certain services, with some life insurance policies, these products or services can be greatly discounted. In the end, look at the added benefits some companies are just giving you and see if this “more” expensive insurance plan is actually cheaper for you to have.

Other things to consider

  • Cost to have a policy mailed
  • Cost to get a loan on your policy (if you have a cash value policy)
  • Interest rate charged on loan
  • Effect of loans or withdrawal on the death benefit
  • Cash value growth
  • Agent availability
  • Customer service agent availability
  • Company financial rating
  • What other plans besides life insurance do they or they agent offer? – This may be helpful later when you need other coverage and do not want to have to deal with a whole new set of people.

We hope this article has helped you understand why price really is not everything. Sometimes when you think you are saving on premiums, you are actually postponing much higher costs in time and money later. We are always happy to hear from you. Your suggestions and questions are most welcome. Be well!

Know About Different Life Insurance Plans

Today, almost everybody owns a life insurance policy. It could be for various reasons like investment purposes or for tax benefits, but the key point is that it provides complete peace of mind. With insurance plans, one does not have to worry about their family’s future security in their absence. These plans provide financial security to the surviving family members after the death of the insured.

Insurance is a must for anybody who has financial dependents. The age bracket to buy a insurance plan is approximately from 18 – 75 years of age. Most of the banks have a minimum and a maximum amount of money to be assured.

Types of Life Insurance Plans

Broadly, the two main types of insurance policies are term insurance and whole life insurance. Term Insurance Plans are the most basic and simplest plans. These plans provide a cover for risks only for a short period of time. After the term comes to an end, you can renew the plan but chances are that the premiums will rise. These plans are economical.

On the other hand, whole life insurance plans are expensive but these policies continue for as long as the insured lives. These plans are sometimes treated as investment options because one does not receive any money till the death of the insured.

Other plans include unit link life insurance plans that offer great investment options along with financial security. Usually, one has to pay two separate premiums – one for the life insurance and one for investment. These plans are beneficial as they provide financial solutions during your lifetime as well as after your lifetime to your family members.

There are retirement insurance plans available for senior citizens too. Insurance policies are extremely important for such people as these plans offer security and freedom to the surviving spouse. Child plans are another choice in insurance plans. These policies provide financial aid for your child’s education, marriage, etc. Another option are the health insurance policies. Health insurance policies provide a cover for medical expenses. These plans are suitable for people who suffer from health problems like diabetes, cancer, etc.

Riders in Life Insurance

Riders are the additional benefits that one can add to their life insurance policies. However, the premium amount increases with the inclusion of these riders. There are several types of riders in insurance plans offered by banks. The most popular of all are:

Critical Illness Benefit Rider: It offers financial aid in case the insured gets diagnosed with critical diseases like cancer, heart attacks, kidney failure, etc. Accidental Death and Disability Benefit Rider: In case the insured becomes disabled following an accident, this rider covers this risk.

Tax Benefits

Tax benefits as per the Income Tax Act, 1961 offer a deduction in the premium amounts, investments, dividends, etc. However, these benefits are subject to amendment regularly.

These Plans protect the needs and requirements of your loved ones in case of unfortunate events. It helps keep your family safe and secure even when you are not around.