For entrepreneurs paying taxes in the US, corporate insurers lower taxes, create wealth, and improve insurance coverage. An insurance company (CIC) is similar in many ways to any other insurance company. He is called "Captive" because he usually offers insurance for one or more affiliated operating units. In the case of internal insurance, the premiums are paid by a company that is in the same "economic family" and not paid to an outsider.
Two key tax incentives enable the CIC's structure to effectively increase wealth: (1) insurance premiums paid by the company to the CIC are not taxed; and (2) under IRC § 831 (b), the CIC will receive up to $ 1.2 million in bonus payments per annum not subject to income tax. In other words, an entrepreneur can transfer taxable income from an existing company to a low-tax insurer. 831 (b) CIC pays only taxes on its investment income. "Dividends received" under Section 243 IRC provide additional tax efficiency for dividends received from investments in company shares.
The first major insurance companies founded about 60 years ago offered insurance that was either too expensive or unavailable in the traditional insurance market.
Over the years, a combination of US tax laws, lawsuits and IRS judgments has clearly set out the steps and procedures required to set up and operate a CIC through one or more business owners or professionals.
To qualify as an insurance company for tax purposes, an insurance undertaking must meet the requirements of "Risk Change" and "Risk Sharing". This is easy to accomplish with the usual CIC planning. The insurance provided by CIC must actually be insurance, ie the actual risk of loss must be transferred from the contributing company to the CIC insuring the risk.
In addition to tax incentives, the key benefits of CIC are more control and flexibility, which improves insurance coverage and reduces costs. In traditional insurance, an external carrier usually determines all aspects of the policy. Often, certain risks can not be insured or only conditionally guaranteed at an exorbitant price. Regular insurance rates are often unstable and unpredictable, and ordinary insurers make reasonable claims by exaggerating small technical details. Although corporate insurance premiums are generally deductible, they will disappear forever once paid to a regular external insurer.
The company's own insurance effectively hedges risks in a number of ways, including individual insurance policies, reinsurers' profitable wholesale rates and combined risks. Detained companies are well suited to insure risks that would otherwise be uninsured. Most companies have the usual "retail" insurance for obvious risks, but remain exposed and subject to losses due to many other risks (ie they "insure" these risks independently). The own company can conclude individual contracts for special insurance needs of the company and negotiate directly with the reinsurers. CIC is particularly well-suited for creating an accident response policy, which is a policy that covers the business losses alleged by the company and does not affect external applicants. For example, a company may take out insurance against loss due to work stoppages due to weather conditions, work issues, or computer failure.
As mentioned above, CIC 831 (b) is exempt from income tax before premium income of up to $ 1.2 million. US per year. From a practical point of view, CIC makes economic sense if the annual price is $ 300,000 or more. In addition, the total amount of the insurance premium may not exceed 10 percent of the annual income. A group of companies or specialists with similar or comparable risks may form an insurance company with multiple parents (or a group) and / or join a Risk Retention Group (RRG) to pool resources and risks.
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