R. Wesley Sierk, III CLU, ChFC, ARM, ACI
Risk Management Advisors, Inc.110 Pine Ave, Ste 310Long Beach, CA 90802
Transform Your Practice Using Captives
Agents always looking for ways to sell big ticket insurance policies
Captives can provide
• Large income tax deductions
• Gift and Estate tax free transfers
• Large life insurance premium sales
Agenda
• What is a captive insurance company?
• How is the property / casualty marketplace structured?
• What are the IRS rules and regulations?
• How can you use captive insurance companies to increase your life insurance premiums and save your clients money?
• Case Studies
The IRS has adversely impacted most of the tax advantaged uses
of life insurance
• Equity Split Dollar• Deferred Compensation• 412(i) Plans• 419A(f)(6)• VEBAs
A Captive insurance company could be the perfect solution for mid-market companies who want
to take large deductions
What is a Captive?
Insurance company wholly owned and controlled by its insureds
Insurance company that insures the risks of the parent company
Assessing the Captive Frontier
MAXIMUMRETENTIO
N
LEAST COMPLEX
ZERORETENTIO
NMOST COMPLEX
Retained
Risk
Guaranteed Cost Insurance Plans
•Loss Sensitive Insurance Plans
•Risk Purchasing Groups•
Self-Insured Retention Plans (SIRs)
•
Single Parent Captives•Cell Captives
•
Association Captives•Risk Retention Groups•
Program Business Captives
•
PrimaryMarket
Alternative Market
Complexity from Buyers’ Perspective
*Captive Insurance Company Reports Estimate
Growth of Captive Industry* 1970 – 2006
1970 1980 1990 2000 0
1000
2000
3000
4000 Market Cycle
Captive Growth
INSURED RISKS
UNINSURED RISKS
Many Insured & Uninsured business risks can be insured through a Captive Insurance Company
We work primarily with the
INSURED RISKS! Health Ins.
D&O
Workers
Comp
Gener
al Liab
ility E
& O
Exc
ess
Contract Claims
Punitive D
amages
Intentional Acts
Exc
lusi
ons
Earthquake
Mold
Construction DefectFin. Guarantee
Deducti
bles
Business Risk Profile
How do we structure them?• Begin with traditional insurance coverage
• Property & Casualty Experts
• Highly Credentialed
• Published nationally on the subject of Captives and Alternative Risk Transfer
• Mainly Domestic Captives
• Mostly Single Parent Captives
What Some Promoters’ Plans Do
• Insure only currently uninsured risks
• Improper use of risk distribution rules
• Cross insure between clients
• Charge excessive premiums for unnecessary insurance (i.e., terrorism, sexual harassment)
• Non-disclosure of tax aspects of plans
• Improper Promotional Material – One promoter’s material calls it “discriminatory,
deductible, deferred compensation program”
Two Main Taxation Types-• 831(b)
• First $1.2 M of premiums tax free• Corporate taxes on investment earnings• Use COLI to defer taxes on earnings
• Regular Insurance Companies• Captive recognizes premium as income• Deduction for reserves and IBNR• Corporate taxes on investment earnings• Use COLI to defer taxes on earnings
Types of Captives:
Rent-A-CaptiveProtected Cell CaptiveSingle Parent CaptiveIndustry CaptivesAssociation CaptivesRisk Retention Group CaptivesAgency Captives
Why aren’t they widely used?
• Nature of Property & Casualty
• Conflict of Interests
• Negative Perceptions
• Offshore Abuses• Only for Large Companies• Too Expensive
• Sophisticated Purchaser / Broker
Onshore vs. Offshore
• Nearly 50 domiciles have passed captive insurance legislation
• Taxation: 954(d) election
• Risk - Real vs. Perceived
IRS Rules and Regulations
• Long standing legislative approval
• IRS is clear on what works and what doesn’t work
• Rev. Rul. 2005-40 ‘Safe Harbors’
Case Studies
Commercial Property
Prospect: Property Owner/Developer
Industry: Real Estate
Income: $3,110,000 in profits
Needs: Strategies to protect assets and reduce tax
Planning: Multiple LLCs
Property Owner/Developer
2 Partners
Real Estate Organization
(16 LLCs)
Captive Insurance Company
1.1M Premium
P&C Insurance
100% Owners Captive Profits
Claims Reserves and Surplus
InvestmentsHigh Cash Value
Life Insurance
Reinsurance
Health Insurance Captive
Prospect: Profitable business ownerIndustry: Wholesale and retail flooring
distributionRevenue: $40,000,000 in company revenueNeeds: Reduce cost of 150+ life group
medical planPlanning: C-Corp, Blue Cross HMO & PPO Plan
Health Insurance Captive
Health Insurance Company
(Front)Parent Company
Captive Insurance Company
1.2M Premium
Claims Reserves and Surplus
InvestmentsHigh Cash Value Life Insurance
ReinsuranceCompany
Coverage above 30k per
Cedes 1.1M Premium
250k Premium
Company Executives
20% Owner
80% Owner
Health Insurance Captive – Employer Benefit
• Reduce (stabilize in some circumstances) current premium outlay for health coverage (currently 10% of GDP, projected to be 25% of GDP by 2015)
• Transform millions of dollars from health insurance premiums into insurance company reserves they own and control
• Ability to use detailed claims payment histories to negotiate better pricing with reinsurers
Health Insurance Captive – Owner’s Benefit
• Company executives are 20% owners of captive insurance company
• Executives use captive ownership as an addition to their retirement planning
• When Executives retire, sell captive shares back to the Company as long-term capital gains
• Potential estate / gift tax savings
Other Prospects
• Developers
• General Contractors
• Subcontractors
• Manufacturers
• Professional Services Firm
• Franchisees
• Restaurant / Hotel Chains
• Family Offices / Estate Planning
• Garment Industry
Captives Can Transform Your Practice
Open better cases with bigger prospects and larger premium opportunities(Recently traveled to Florida with an NFP producer, eight meetings in two days, each prospect had a net worth in excess of $100 Million. The producer used captives as a differentiator)
$20,000 Agent Referral Fee
Life Insurance Commission (no splits)
Coming Nov 2007- preorder available at takencaptive.com
Next Steps – How to Work With Us
1. Call us to discuss new cases – tell us the client’s “story”
2. Gather census data, client “wish list”, and current plan information
3. We will prepare a proposal and/or “narrative” and discuss with advisor and client
4. We will prepare final numbers based on client and/or advisor feedback
5. Plan implementation begins.
You may reach us at 877-RMA-CAPTive (877-762-2278)
or send an e-mail to [email protected]