What Is A Captive Insurance Company & Should I Use One?

All right, let's move to the next one on the list. And we had somebody on the podcast a few weeks ago talking about captive insurance companies. He's basically sells them, for lack of a better description, as 831PLANS. Your thoughts on how captive insurance companies work and where the line is when it becomes abusive?

Sure. So I have not had any clients that have done this plan. I recommended it to some of my clients. And the major reasoning behind it is because you're able to really help mitigate risk within your business, but you have to earn enough money to make it a good cost benefit because they're very expensive to administer, they're very complicated to administer. You have to use a company that is dedicated to them. I highly don't recommend doing them yourself, but essentially what you're doing is you're creating your own insurance company. And instead of you paying some other insurance company these high premiums, you're able to move the money from your business being taxed at ordinary income tax rates to being a deduction, you know, for your business. So, like, let's say you pay 100,000 in premiums, and that 100,000 is a, is income to the. Your captive, which is basically a C corp, but you don't have to pay tax on. I think right now it's about 2.4, $2.5 million in premiums. So your captive is not paying any tax on it. It's going and investing in it. It's going into a pool. That basically, if you do need to make claims, then you can do that. But what's great about it is at the end, when you want to close it down, take the money out, it's now being taxed at capital gains rates. So that's like, that's a really nice savings. But I've seen other advisors, when I've gotten their plans, when they're recommending these, in my opinion, you need to have at least 2.5 to $3 million gross in revenue before you even start, before it's even a good cost benefit. Because, I mean, this is costing anywhere from like 50 to $100,000 a year for you to administer properly, which is a deduction not in the first year, but in the subsequent years. And so it's. It's really a very specific subset of people that can do this and make it work. And you need to have a genuine risk that you're trying to mitigate or have, you know, replace your. Some of your insurance that you already have.

Yeah, I think it's important to point out too, as I understand it, while the money is in the C Corp, while it's in the captive insurance company, it doesn't grow tax protected like a 401 or a Roth IRA would that you're paying at corporate income taxes on earnings on that money while it's in there.

Correct? Correct. Yes. Yes. So you're at that 21% at the moment. So that's nice. It's going to be lower than your rate if you had kept it in your, you know, had taken it as a distribution or salary. But yes, there is that. And then, you know, like I said, when you go to take it out, you're going to pay tax on it as well.

Obviously you don't want to do this unless you have a pretty successful business going, but when do people get too aggressive with this?

When have they tried to do too much into the plan? Like, you got to make sure that the amount of premiums that you're paying are equivalent to what the premiums you would pay if you were to buy like an outside plan. And also too trying to do it yourself. I've only seen it wasn't one of my clients, but a colleague who had a client that tried doing it themselves. And oh, it was a big mess. And like they got in a lot of trouble with the IRS and they ended up having to close it all down and tons of penalties, tons of interest.

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