Turn Expense into Equity: The Captive Insurance Strategy (CIC)
Turn Expense into Equity: The Captive Insurance Strategy (CIC)
Your business pays $2M a year in insurance premiums to big carriers. That money is gone forever. How to start your own insurance company, pay the premiums to yourself, and turn a sunk cost into a tax-advantaged war chest.
Executive Summary
- The Problem (Rent vs. Own): Most businesses “rent” insurance. They pay premiums to Hartford or Chubb. If no disaster happens, the carrier keeps the profit. You have a 100% loss on the premium.
- The Solution (CIC): You form a **Captive Insurance Company (CIC)**. Your main business pays premiums to the CIC for risks that commercial carriers cover poorly (e.g., Supply Chain Disruption, Cyber Attack, Brand Reputation).
- The Tax Arbitrage (Section 831(b)):
1. **Operating Company:** Deducts the premium as a business expense (Reduces Taxable Income).
2. **Captive Company:** Under IRC Section 831(b), small insurance companies pay **$0 Income Tax** on the first ~$2.8M of premiums received annually.
👉 Result: You moved $2.8M from a taxable pocket to a tax-free pocket.
The “Real Insurance” Test
IRS Warning: A CIC is not a slush fund. It must be a legitimate insurance company.
👉 Risk Distribution: You cannot just insure yourself. You must pool risk with others (Risk Distribution) to qualify as “Insurance” under the law.
👉 Actuarial Science: The premiums must be priced by a certified actuary, not pulled out of thin air. If you charge $1M for “Pencil Breakage Insurance,” you will go to jail.
Mechanic: The Wealth Accumulator
Simulation: $1M Annual Premium
| Feature | Commercial Insurance | Captive Insurance (CIC) |
|---|---|---|
| Premium Destination | Carrier’s Pocket | Your Pocket (Surplus) |
| Tax on Premium Income | Carrier Pays Tax | $0 (Up to ~$2.8M Limit) |
| Coverage Flexibility | Standard Policy Only | Tailored (e.g., Pandemic) |
“A Captive turns a ‘Checkbook Expense’ into a ‘Balance Sheet Asset.’ Instead of buying protection, you are building a bank. When the storm comes, you have coverage. When the sun shines, you have profit.”