Captive Insurance (831(b)): Turning Risk into Wealth
Tax Tips / Business Owner
Captive Insurance (831(b)): Turning Risk into Wealth
๐ก Executive Summary
- Problem: Your business pays massive premiums for commercial insurance, but coverage is limited (exclusions), and if you don’t file a claim, that money is gone forever (Sunk Cost).
- Solution: Form your own insurance company (a “Micro-Captive”). Your operating business pays premiums to this Captive.
- Result: 1) Operating business gets a tax deduction. 2) Captive pays $0 tax on premium income (up to ~$2.8M/yr). 3) Profits accumulate in the Captive as a war chest.
โ ๏ธ IRS “DIRTY DOZEN” ALERT
Micro-Captives are under heavy IRS scrutiny. To be legal, it must be a real insurance company with real risk distribution (often achieved via “Risk Pools”). If you treat it solely as a tax shelter without legitimate insurance purpose, the IRS will dismantle it and impose heavy penalties.
Micro-Captives are under heavy IRS scrutiny. To be legal, it must be a real insurance company with real risk distribution (often achieved via “Risk Pools”). If you treat it solely as a tax shelter without legitimate insurance purpose, the IRS will dismantle it and impose heavy penalties.
For businesses with significant free cash flow and unique risks (e.g., Cyber Attack, Supply Chain Failure, Brand Reputation), a Captive Insurance Company (CIC) is the ultimate upgrade. It transforms “Expense” into “Equity.” Instead of renting insurance from AIG or Chubb, you build your own fortress.
๐ง Core Mechanic: Section 831(b) Election
Under IRC ยง 831(b), small insurance companies (Micro-Captives) are taxed only on their investment income, not on their underwriting income (premiums received).
โข Premiums In: $2.5M (Tax-Free to Captive)
โข Claims Paid: $500k
โข Profit: $2.0M (Retained Tax-Free)
Under IRC ยง 831(b), small insurance companies (Micro-Captives) are taxed only on their investment income, not on their underwriting income (premiums received).
โข Premiums In: $2.5M (Tax-Free to Captive)
โข Claims Paid: $500k
โข Profit: $2.0M (Retained Tax-Free)
Performance Simulation
10-Year Wealth Accumulation
Commercial Insurance Only
$0 Retained (All Sunk Cost)
Empty
Captive Strategy ($2M/yr)
~$25M+ Surplus Assets*
Wealth Created
Commercial vs. Captive Insurance
| Feature | Commercial Carrier | Your Captive (CIC) |
|---|---|---|
| Premium Payment | Expense (Gone forever) | Expense -> Asset (Kept) |
| Coverage | Standard policies | Custom (Cyber, Brand, Reg) |
| Profits | Shareholders get them | YOU get them (Dividends/CG) |
“Fortune 500 companies have used Captives for decades to manage risk and profit. Section 831(b) democratizes this powerful tool for mid-sized private businesses.”
๐ Related BMT Playbooks (Internal)
๐ก๏ธ The Companion: Cash Balance Plan (Another deduction for businesses) โ๏ธ The Exit: Transferring Captive assets during an ESOP sale โ The Investment: Investing Captive reserves into PPLI๐๏ธ Institutional Resources (External)
๐ Legal Text: IRC ยง 831(b) (Tax on Insurance Companies) ๐๏ธ IRS Warning: Compliance Guide for Micro-Captives ๐ Industry News: Captive.com (Resources & News)
BMT designs for tax reality, not theory.