Turn Expense into Equity: The Captive Insurance Strategy (CIC)
Turn Expense into Equity: The Captive Insurance Strategy (CIC)
Stop renting your insurance; start owning it. How profitable business owners can pay premiums to their own private insurance company, creating a massive tax-advantaged war chest for the family.
Executive Summary
- The Problem (Sunk Cost): Your business pays $2M a year in premiums for Liability, Work Comp, and Cyber insurance. If you have no claims, that $2M is gone forever. It is a pure expense paid to big carriers like Chubb or AIG.
- The Solution (The Captive): You form your own licensed insurance company (CIC). Your operating business pays the $2M premium to *your* Captive.
👉 The Tax Magic (831(b) Election): Under IRC Section 831(b), “Micro-Captives” receiving under ~$2.8M in premiums pay **0% Federal Income Tax** on their underwriting profit. - The Wealth Transfer: The Operating Company gets a tax deduction (Expense). The Captive receives the money tax-free (Income). If the Captive is owned by a **Dynasty Trust** for your children, you have effectively moved $2M of pre-tax profit out of your estate and into your heirs’ hands.
The “Real Risk” Mandate
IRS Warning: This cannot be a sham. The Captive must insure REAL risks (e.g., Supply Chain Interruption, Brand Damage, Cyber Attack) and must use actuarially sound premiums.
👉 Risk Distribution: You generally need to pool your risk with others (Risk Pool) to prove to the IRS that this is a legitimate insurance company, not just a tax shelter.
Mechanic: The Profit Retention Cycle
Simulation: 10-Year Horizon ($1.5M Annual Premium)
| Feature | Commercial Insurance | Captive Insurance (CIC) |
|---|---|---|
| Premiums | Lost Expense | Retained Asset |
| Coverage | Standard exclusions | Tailored (e.g., Pandemic, Audit) |
| Claims Process | Adversarial (Fight for it) | Friendly (Your Rules) |
“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 keep the profit. It converts ‘Dead Money’ into ‘Dynasty Money’.”