Captive Insurance (831b): Turning Business Risk into Personal Wealth
Tax Tips / Business Owner
Captive Insurance (831b): Turning Business Risk into Personal Wealth
💡 Executive Summary
- Problem: Businesses pay huge premiums to commercial insurers for generic coverage, and that money is gone forever (Sunk Cost).
- Solution: Form your own “Micro-Captive” Insurance Company to insure bespoke risks (Brand, Cyber, Supply Chain).
- Result: Operating Business deducts premiums (Exp) ➔ Captive receives them Tax-Free (Rev) up to ~$2.8M/year.
⚠️ IRS “LISTED TRANSACTION” ALERT
Captives are under high scrutiny. It must be a real insurance company with risk distribution and actuarial pricing. If you use it solely as a tax shelter without genuine risk transfer, the IRS will dismantle it.
Captives are under high scrutiny. It must be a real insurance company with risk distribution and actuarial pricing. If you use it solely as a tax shelter without genuine risk transfer, the IRS will dismantle it.
For profitable business owners (Tier L3+), the “Micro-Captive” election (IRC § 831(b)) is the ultimate arbitrage. It allows you to move pre-tax dollars from a high-tax environment (your operating company) to a 0% tax environment (your captive), provided you play by the insurance rules.
🧐 Core Mechanic: The 831(b) Election
Small insurance companies (premiums < $2.8M indexed) pay 0% Federal Income Tax on their underwriting profit. They only pay tax on investment income.
Small insurance companies (premiums < $2.8M indexed) pay 0% Federal Income Tax on their underwriting profit. They only pay tax on investment income.
Performance Simulation
Cash Flow Impact ($2M Premium)
Commercial Insurance (Expense)
$2M Gone Forever
Sunk Cost
Captive Insurance (Asset)
$2M Retained in Family
Wealth Created
Commercial vs. Captive
| Feature | Commercial Insurer | Your Captive (831b) |
|---|---|---|
| Deductibility | 100% Deductible | 100% Deductible |
| Underwriting Profit | Kept by Insurer | Kept by YOU (Tax-Free) |
| Investment Income | Kept by Insurer | Kept by YOU (Taxable) |
“Don’t just insure your business; own the insurance company. It turns ‘Risk Management’ into a profit center.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Manager: Family Office (Often manages the Captive) ⚖️ Sibling Strategy: Cash Balance Plan (For Income Tax) ✅ The Vault: DAPT (Protecting the Captive’s Assets)🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 831(b) (Tax on Insurance Companies) 🏛️ IRS Official: Captive Insurance Guidance 📘 Industry Data: NAIC Captive Insurance Center
BMT designs for tax reality, not theory.