The Self-Insured Fortress: Captive Insurance Companies (CIC)
The Self-Insured Fortress: Captive Insurance Companies (CIC)
Stop renting your safety; own it. How to turn sunk-cost insurance premiums into a tax-deductible wealth accumulation vehicle using Section 831(b).
Executive Summary
- The Problem (Sunk Cost): Your business pays $500k/year for liability, cyber, and supply chain insurance. If no disaster happens, that $500k is gone forever. It’s a pure expense.
- The Solution (The Captive): You form a **Captive Insurance Company** (CIC). Your operating business pays the $500k premium to your CIC.
👉 OpCo: Takes a $500k tax deduction (Expense).
👉 CIC: Receives $500k. Under **Section 831(b)** (Micro-Captive), it pays 0% Income Tax on premiums (up to ~$2.8M/year). - The Profit: If no claims occur, the CIC keeps the $500k. It invests this capital (stocks, bonds). You have effectively moved $500k from a taxable entity to a tax-favored investment vehicle.
IRS “Sham” Warning
Red Alert: The IRS hates fake captives. You cannot just move money and call it insurance.
1. Risk Distribution: Your CIC must insure risk from others (risk pooling) or have enough distinct entities to prove it’s a real insurance company.
2. Actuary Required: Premiums must be priced by a professional actuary, not pulled out of thin air.
Mechanic: The Section 831(b) Engine
Simulation: Commercial Insurer vs. Captive ($1M Annual Premium)
| Feature | Commercial Insurance | Captive Insurance (831b) |
|---|---|---|
| Premiums | Lost (Expense) | Retained (Asset) |
| Coverage Types | Standard (Fire, Theft) | Tailored (Brand Damage, Pandemic) |
| Tax Treatment | Deductible | Deductible (OpCo) + Tax-Free (CIC)* |
*Note: CIC pays tax on investment income, but not on premium income under 831(b).
“Insurance is the only business where you pay for a product you hope never to use. With a Captive, if you don’t use it, you get to keep the money. It aligns your risk management with your wealth management.”