011 | The Captive Insurance Advantage: How to Own an Insurance Company with Chad Spitzer

Episode 011 |
Owing Your Own Insurance Company: The Captive Insurance Advantage with Chad Spitzer

Patrick Lonergan: Welcome back to the Vital Strategies Podcast, where entrepreneurs learn how to pay less tax, build wealth, and live a great life. Today, I’m joined by Chad Spitzer, who is an expert on how to utilize a Level 3 tax strategy called a Captive Insurance Company. Chad has spent years helping businesses leverage legitimate strategies to safeguard their assets, manage risk, and maximize their financial standing.

Chad will share his knowledge of captive insurance and using it appropriately. He will guide us through the complexities of setting up a captive, and we will discuss how a captive can fill the gaps left by conventional insurance. Also, we’ll understand how entrepreneurs can use the IRS tax code to their advantage while accomplishing these goals.

If you haven’t had a chance yet, I strongly recommend checking out the previous episode. It is full of information explaining the ins and outs of 3 tax strategy that could reshape the way you approach your finances. We will build on the concepts from the last episode that will guide you through the application of captive insurance and the value it can bring to your financial journey.

As a business owner, if you’re seeking to protect your assets, optimize risk management and create tax efficiency. This episode is tailor made for you. Stay tuned as we introduce the idea of captive insurance with the insights of Chad Spitzer.

Chad, I appreciate you joining me today. We’ve got Chad Spitzer from Captive Insurance Group, part of Higginbotham. I appreciate you making the time. Can you just tell us a little bit about, we’ll just start high level. What is captive insurance and who would be a good fit to have a captive insurance company?

Chad Spitzer: Absolutely. So, the idea of captive insurance and kind of how it came about and what it is, I’ll try to touch on those things is. This is a completely separate entity that we would set up for what let’s say, ABC construction company. We’ll start there. We will set up a separate entity that has its own EIN, own bank account, own RSM Corporation, everything’s, directors, officers, all of it.
So, this is a completely separate entity, and today we’re talking specifically, t
here’s a lot of captives that can be out there. We’re talking about what they refer to as a cell captive, or a single parent captive, a peer captive. Owned how the insured would like for it to be owned. So, if ABC Construction Company is owned 50/50 with 2 partners, the captive will be owned the same.

Or however they determine they would like for this other entity to be owned, which we refer to as a captive insurance company. So, once that entity is formed, we utilize that entity in a few different ways. This is not necessarily the max of what you can do with it, but it’s a few ways that are most basic.

That may apply to some of your listeners. So one may be, hey, I have significant deductibles on your commercial insurance side. And I’m going to take, for example, that the one that may apply to a lot of people is for example, now property, a lot of property carriers, they’re experiencing a lot of losses.

Right. So they’re requiring that you take on significant deductible. So you have a $10 million building and they’re making you take on a million dollar wind and hail deductible, which we can do. But the downside is when the storm comes, you now are going to have to pay out a million dollars. So why can we not utilize this insurance company, this other entity that we’ve set up to put money aside into our own insurance company, to cover for those big deductibles? So that way we’re able to set up a money and build up surplus in order to cover for those large deductibles.

Patrick: That’s fantastic. Can I jump in and ask a question? So when we think about those deductibles, right, can you talk a little bit about how the risk is sort of shared in a captive, even though I have my own company set up, can you, can you touch on that?

Cause it sounds like, oh, if I’m putting the money into my own. Entity, and then I’m going to have to take it back out. How have I saved any money there on that big deductible?

Chad: So, absolutely. So, there’s an economic side of that as well, which I think we’re going to touch on it just a bit, but first off it’s, hey, I’m putting money aside and there’s efficiency there financially, but also you’re captive will participate in a risk pool, which is a reinsurance risk pool where it can, it can share in that burden.

Say deductible $1,000,000 deductible so that you’re not having to pay on that full amount. Say I’m just, this is just an example. You have the storm come through and you owe 1, deductible. We filed a claim on your chapter for that $1,000,000 deductible. Your insurance company may pay say $250,000 of it. And then our reinsurance risk pool will pay $750,000 of it.

So, while there’s a lot of, um, economic efficiencies in putting the money aside in and of itself, there’s also the side of it that you’re getting re insurance for those deductibles that otherwise just doesn’t really exist out there. Um, and you have the ability to do that in your own insurance company.

So there’s that side of it as well, so that it, you know, levels out your financials a bit where you’re not just going to get a huge spike in an expense that you don’t expect when there’s a storm on a zero, you get help from a reinsurance risk pool. To help cover part of that plan.

Patrick: Fantastic. Thank you. So would you say a good fit for, for captive is when there’s gaps in the we’ll solve, call it the commercial market that the business owner can’t get coverage for, we can bring the captive in and sort of fit into some of those, those gaps there.

Is that, is that typically how you’re seeing this strategy used?

Chad: Yeah. So that was the first one I talked about was just the deductible side of it. So, I’ll go off of a few different ways we use it. One is big retentions, deductibles, self-insured retentions you have on your commercial side. Next would be, hey, I would like to cover for certain gaps that I may have in my coverage.

You know, we, we’ve been purchasing our professional liability policy for the last 10 years. All of a sudden the carrier comes in and says, hey, we’re no longer going to cover this situation. Hey, add on an exclusion to that policy, or you get denied coverage when you had a claim that’s occurred. The idea of the captive is to take on those exclusions that exist and provide a coverage in those scenarios when you’re being denied coverage.

Not that it covers everything, but the policy is written more broad. To allow for those claims to be able to actually receive coverage in those instances. So yes, we would then also price in additional policies that backstop what you currently have so that you can be provided that additional coverage that you may otherwise not have on your commercial side.

Patrick: That’s fantastic.

Chad: So the next person to potentially be a candidate would be someone that, hey, I’m paying a lot in premium. You know, I have a significant premium expense, $200, $300, $400 plus $1,000. That they’re paying premium and feel that, hey, I’m not really even using it that much, but maybe my rate just keeps going up every year because we are in what’s called a heartening market in the insurance world, which is premiums are going up, right?

You have catastrophic events that are occurring on the property side, storm wise, all those things. Where it causes these carriers to have massive losses. So because of that, they make up by charging more premium. So those areas may be a fit for some listeners that are paying a significant amount in insurance that don’t have a lot of claims to say, is there something I can do on a captive to set up this entity?

We’ve set up to take on a portion of that risk to then get some premium savings. On the other hand, there’s a lot we can do there, right? There can be root captive structure. There can be. Hey, we get a front end carrier involved in reinsurance. There’s a lot we can do. So that’s a, a long way of saying there’s flexibility with a single parent captive to do any one of those things that we kind of discussed.

But especially with those that are paying large premium amounts with not a lot losses captive may be something to consider, um, to see some premium savings.

Patrick: So, talking about premiums, I think that’s an interesting question. How do you go about pricing the cost for this coverage? Cause it’s, you know, I could have an opinion on what it costs.

You could have an opinion, but I think for this to be a legitimate insurance company, we have to have a methodology to it. So how does that come about?

Chad: Yeah, absolutely. That’s a, the biggest, one of the biggest factors in this is utilizing a third party actuary that is determining these premiums and any one of those scenarios that we discussed, no different than a, you go by your commercial policy, they’re using in house actuaries with Travelers or wherever you’re purchasing your insurance from wherever the carries, they have in house actuaries pricing, what your risk is, what the commercial market looks like, what it looks like in your geographical area. No different in the captive space. Where we engage a third-party actuary that will analyze what your commercial policies currently look like. What are we looking to price? Exactly how often those things are occurring and what that actual number should be. So, there’s a mix of how they do that between. I’m certainly no actuary between what commercial tables look like as well as what your experience has been a benefit on the captive side is especially paying a lot of premium.

But can I get savings over here? The benefit is, you know, the commercial world, they’re just taking you and bundling you in for the most part with, hey, you’re a manufacturer. Here’s what all the U. S. manufacturers look like. And that’s that. There’s, it’s not as plain and simple as that, but for the most part, that’s how it looks. On the captive side, we’re directly doing the underwriting with the actuaries where they’re more looking directly at you as a risk, as well as what your loss experience has been and not just pigeonholing you into, Hey, you’re just a manufacturer and we put you into this bucket. So that’s the advantage is a cost control side of a captive is being able to actually be underwritten for who we are.

As ABC construction or manufacturer, as opposed to just being bucketed in with all these other guys, that their risk is just different than what we actually are.

Patrick: So, the premium that I pay into my insurance company, from what I understand, it works very similar to a regular insurance company.

Like all the premiums come in, they have a, we’ll call it a general account. And then when claims are filed, they pay those out of that, that general account. Can you just talk a little bit about. How does this practically work for somebody that starts their own company? Where did the premiums go? And then I think my follow up question will be like.

What percentage of the premiums are they paying in, you know, are typically going out in the form of, you know, claims and that type of thing?

Chad: The whole idea of capitalism, why it came about was the idea that we should be able to put money aside for our own business to cover for these claims that could occur.

The iris allows for those things so that we have the ability because you would otherwise just say, I’ll just put money in a bank account in my business and let it run. Why do I need to put it into an insurance company? Well, the reason and these came about and captives for these smaller companies are able to do this for.

It’s so that you can actually build up the surplus faster, as opposed to just putting it into a bank account where you’ll pay tax at the end of it. So that’s why captives just came about. You’re paying a claim that’s deducting on your business side, no different than your normal insurance expense. And it’s then going into your own insurance company, so that you get the ability to, um, use the IRS tax code, which allows you to build up surplus faster and have money available to pay on those claims.

So that’s why it was done that way, is to allow for you to do that. Now, you’re paying all of the premium net of, um, our costs to manage the insurance company. It goes into your insurance company account. While it’s there, you’re able to invest those dollars. Um, conservatively, we have an investment policy statement, um, that you need to, that’s approved by regulators that oversee the insurance company, because it is all regulated.

But you’re able to invest those dollars that are tax deferred. Now, you asked about claims. Obviously, if you have a claim of your own that you have to pay for, that comes straight out of the account to pay it, but you’re also participating in this risk pool, potentially, and not everyone has to participate in that risk pool, depending on what purpose you’re doing the captive, but if you are.

You know, it’ll depend on each year, but you’re somewhere around 3% to 5%. Um, it could be more could be less that will go to pay for others claims that occur in the risk pool. You pay a hundred thousand in premium. You expect to pay three, four, five, six grand for others that occur in the risk pool. That’s where everyone is sharing in that risk with each other.

So, you take out the fixed cost to manage the insurance company take out any, um claims that may occur inside of the risk pool, which you participate, and the remaining dollars are surplus that’s available to you. Whereas, had you done this in a typical structure, where you’re just paying, say, Travelers, your premium, you would have a loss.
Those dollars are gone. You set it on fire. But in this case, you take out claims from yourself, from the risk pool, and whatever’s left over is now yours. You’re keeping those dollars. As opposed to it all just being gone, you know, state of the losses.

Patrick: Sure. Fantastic. So, there’s some real efficiency there.

You know, I get it sort of keep control of those dollars versus like you said, start them on fire. That’s uh, that’s good. Okay. I think there’s another question here that I think is factors into this as well. That really matters is when we think about insurance premiums, those are tax deductible to us. So are the dollars that I put into the captive, are those also tax deductible?

Chad: Yeah so, you’re right. No different. You’re deducting on your business side, and then we have this new entity that now receives money, which is the premium coming into it. So, you would say, okay, I need to pay tax on those dollars. That is true. And by the way, these are set up as C Corps insurance companies in the United States, that’s how they’re structured, so it’s a flat 21% right now.

So, when it receives those dollars, you think, okay, I got $100 grand, I’m at premium received, I need to pay $21,000 in tax. Well, no. Because there’s a few different things that the IRS allows for you to deduct off of that, that lowers that burden on the insurance company side. So there’s two different ways that insurance company can be taxed.

One is that standard, which is you paid 21%, but they let you to deduct things. For example, the management fees to manage the insurance. We work with actuaries that they calculate reserves at the end of the year. Hey, I made it three months into my policy period, but there’s nine months left. But at the end of the tax year, what, what amount of money do I need to make sure that I have set aside in reserves for potential claims that incur, that we don’t know about?

The reserves are calculated by the actuaries that’s deducted from that amount. There’s earned and unearned premium is what? It’s, so 365 day policy period. Every day you’re earning premium. So by the end of 12/31, the tax year. You may have only earned half of that. The remaining half is considered unearned, which they allow you to deduct 80% of those dollars.

So, there’s a lot of things that lower that tax burden on the insurance company’s side, and that’s done by design, right? It wouldn’t make sense in the insurance world for carriers as well if they weren’t able to. Put these reserves on the books and deduct these things. They make no sense to ever set up an insurance company, just put it in a bank account, pay the tax, and move on.

Right. But they allow for these things so that you can have surplus available to cover for claims. So that is one way that it’s taxed. The other one that some may know about is where you make what’s called to be election. And you allow to say, hey, I’m not going to pay any tax on the insurance company side.

And this came about so that you were able to build up surplus, for example. We start this and say, July 1st, we go 6 months, pay some amount of tax at the end of the year. And then a month later, I have a big claim to say, well, shoot, why did I pay all of those dollars in tax when I now need those to pay on a claim, which is the election came about is to allow for you to not have to give those dollars up in tax and instead build up the surplus to have the available throughout the year. So, you can make that election or there then is no tax paid on the insurance company side is that’s another possibility.

Patrick: Got it. We can take a couple of different paths off of this, but why would anybody elect to pay the tax versus not pay the tax. It seems like if I’m, if I’m a business owner, I don’t, I feel like I’m already paying too much tax.
So why would I make an election where I voluntarily give the IRS a little more money than I wouldn’t necessarily have to.

Chad: Yeah. Especially given that’s available, anyone would say we would do that because the structure doesn’t really change between it. Other than it’s just making election on the tax return, where you check the box.
So the reason being is that because this came around, where you’re deducting on one side and not paying tax on the other side until the funds come out, there were people that took advantage of that, right? That they didn’t incorrect 15 years ago or so, whatever it may be, where they weren’t properly setting up the insurance company they didn’t properly have the premium priced by actuaries.

The policy issuance was in question. The ability to actually file a claim was a question. There was a lot of issues that they ran into, which those taxpayers lost those cases, uh, to the IRS and tax court because they weren’t doing things the right way. So, because of that, there can be a little bit of scrutiny relative related to, hey, if you’re making what’s called the B election.

We may want to look at if we do, are they really going to listen to you properly? Are you going to spend a fortune trying to fight that? Right? So, we keep our ear to the ground on all of this. What we do is to follow the court cases. Make sure we know, are we doing the best practices and following what it should be?

We’re conservative in that and make sure that we are doing this for the right reason. And this is not just some tax player investment vehicle. This is a true insurance company for a risk mitigation reason only. What does carry some tax benefits? It carries those just so that it makes sense from an insurance perspective to put those dollars aside So what whether you make that election or not is kind of a risk tolerance thing from the perspective of hey, can they look at you?

Absolutely, and is that worth your time to have to potentially fight that or not? We feel that everyone does it for the right reasons that we work with but you never know What may come up so that’s kind of the deciding factor for each person

Patrick: So, the IRS looks closely at captives Right. And I think that’s because one of the things that you, you just talked about, they were, they’re being abused as a tax shelter versus utilizing them for the, the insurance benefits.
And we’ve had some clients come to us. We’ve even talked through that where we’re looking at this captive that was set up and it. My eyebrows are raised at how things were done. It was, it was very, all the I’s weren’t dotted and T’s crossed. So we can see why the strategy has ended up on what we’ll call the IRS dirty dozen list, right?

Like it’s, it’s, it’s one of those things that the IRS looks very closely at. Can you talk a little bit about Captive insurance group and how you as an organization mitigate some of these, the scrutiny that the IRS is going to give this, like how do we protect the business owner from spending what could be hundreds of thousands of dollars in, in tax court, trying to defend themselves against this strategy.

Cause at the end of the day, you know, it probably wouldn’t have been worth it for the insurance benefit, any tax benefit we got. You know, the peace of mind is out the window too. So, can you just walk through that a little bit on, on how that works in your firm?

Chad: Yeah, absolutely. So obviously anything that the IRS comes out with, we, we, you know, we prefer more guidance from them in those situations that there’s something they prefer we do.

We try to do that. So typically, we’re only able to follow that and what may be a potential judge rules on a certain case that, hey, we did like this. We like this and try to adjust accordingly. So that’s first we try to adjust their rate to next is. It’s just really doing things the right way, right? We work with people that know and are good in the industry.

We work with attorneys that work on our documents and policies and issuance and all of that, that have been in this industry for a long time and are super well known. The actuarial firm we use is one of the biggest ones, private actuarial firms through the PNC space. And definitely the capital space in the country.

So, it’s utilizing those guys. So, we make sure, hey, are we doing things how it should be industry wise? Are we doing things properly from a legal perspective and making sure that our clients understand all aspects of that? Does that make you bulletproof from the IRS potentially coming and asking a question?

No, it doesn’t. There’s just no way around that side of it. But if we make sure that we’re doing pricing properly, issuing the policies correctly, have the proper agreements in place. Doing our annual meetings, repricing properly, having actual reserve opinions issued, having a financial statement audit done every year, we make sure we’re doing all of those things.

And part of that is also working with the regulator, that’s reputable as well. Um, you know, you don’t want to be with some new, not that a new regulatory body is bad. That’s not true. There’s some that are great. But some that maybe you’re a little bit off that just don’t seem to make sense that, hey, we don’t require that you file any of this stuff with us each year.

That may want to ask some questions on why does this regulator not require that I do anything? Um, that’s not the right answer. So, we make sure we’re working with reputable domiciles as well.

Patrick: Sure. And that’s an interesting point because I know offshore captives got a lot of. Scrutiny because of the lack of regulation.

And we’ve seen some of those that were set up offshore originally sort of come back onto US soil. So, I think some of our clients and listeners just are unaware of what a good captive looks like, you know, a good administrator looks like what would be some like warning signs if you, if you have any thoughts of something I should stay away from, if I’m being approached to, to utilize this strategy.

Chad: Sure. And out of fairness, there’s, you know, I’m not as familiar with all the stuff off door, but there’s a lot of very reputable kinds of operations that are out there, you know, there’s these group captive operations of the biggest ones in the world, and they, they have, there’s all off door and there’s massive captives that are also that all function great, but there were some off road to your point that were at random places with not good regular regulatory bodies or any of that that did not go well and they’re trying to move back. So, you’re right on that side of it, but in fairness to everyone else, that is some aspect, but you’re absolutely correct.

So, you know, it’s just making sure that you’re working with from an administrative perspective people that are requesting the right things, right?

If they’re if you’re working with a captain manager that is looking to back into some premium number Looking to price things that aren’t true risk in your business Trying to inflate premium for unknown reasons, not issuing policy properly, don’t have a structured approval in place to help actually share any losses that you, that you use, aren’t using the outside actuaries, all those things that kind of already touched on, those are all, um, some red flags that we need to consider when setting up a captive.

And truthfully, just that aren’t good about explaining the true reasons behind risk mitigation side of it, those that are just coming out to talk about the economic efficiencies of a captive. Well, that’s not necessarily the reason to set up a capital. So those are all things to consider when potentially looking at a captive insurance.

Patrick: Yeah, I think those things are all, all really good points. Uh, one thing that we do a lot of with working with our clients is making sure we’re. Helping to manage the cashflow to be able to make the premiums, uh, on a, on a regular basis, can you talk about the importance of like being able to fund the captive sort of year in and year out and make sure that, uh, everything’s going well there and that, you know, just because I had a good year, I shouldn’t go start my own captive.

Chad: Yes. This is a long-term play, right? And mitigation, it should be that it’s because we have the true risk in our business and we need the coverage for it. So, um, making sure that we have the dollar set aside or planning for it is super important so that we continue to pay that no different than a typical commercial policy and have the dollars available.

So, as you’re kind of saying, hey, I had a great year. I’m going to go set up a captain. No, that is not the reason to do a captive. It is instead. I have these risks in my business. And we truly need this. What do we have a budget wise to set aside to cover for those risks that we have and continue to do that each year after because it continues to be a risk, if not a growing risk for us.

And then those captives that we set up for people that it’s, hey, we’re replacing our current coverage and we need this. We’re paying a lot of premium. We want to adjust and use it in a captive. In those cases, same deal. You obviously need to continue to pay to have the coverage in it, but that is massively important to make sure you have the ability to pay on that.

And on those that you’re replacing it, some may feel in a captive space. Oh, I’m going to get savings year one because, you know, I’m taking on some of this risk. We’re currently paying $500,000 in premium. I’m going to take on some risk of my captive. I’m going to pay $250 now. Well, not necessarily typically in a captive.

It’s always typically more spend in the first year to then hopefully get benefits of it when you don’t have losses in the years following so that sometimes can throw people off of, hey, I’m setting up a captive because I’m paying a ton of premium. Um, so I’m going to get year one savings. No, you probably have more expense in your one.

We’re setting up an entity. We have to capitalize that entity with money. Um, as the regulators require, we then also need to pay our same premium. But yes, the advantage is that it’s going towards my own so that when I make it a year or two without claims, now I have money available to receive back. And then it continues to come back every year if we don’t have claims, but definitely misconception of people that think if I’m going to get premium savings, it’s going to be huge in the first year. No, it’s probably more in the first year.

Patrick: Sure. Yeah. No, that, that makes a lot of sense. And you talked about capitalizing the company. Is there some rough numbers on how much money needs to go into the captive year one to sort of almost like any business to fund it, to have the capital, to, to move forward?

Chad: Yeah. So, it’s a little bit dependent on what lines of coverage you’re putting in there. Are they, what purpose are they doing for the captive? What have the losses been previously, all of that, and what are the actuaries determining because the actuaries perform proformas for us to say, here’s a no claim scenario, a decent normal year and an adverse year of claims.

What is the capital and premium and surplus ratio look like? And do we have enough but take all of that out a standard one with the regulators where we work, which is in North Carolina. We work in states as well. But all the states are a little bit different on capitalization, but where we do most of ours, it is a minimum of $60,000.

And then max is pretty much $250 for the most part for everyone. And then otherwise, about 20% of that first year’s premium, you pay $100, grand. That’s not enough, but $60 grand minimum $250 max. And other than that, $250,000, or sorry, 20% of that premium in the first year of capitalization. Unless again, it’s a different line of coverage that has a lot of claims and they actually show that we need more capital to support it, then we’re going to have to put more into it.

Patrick: Okay, great. And just to be clear too, like any investment I make, that capital contribution is not tax deductible. I can’t count that as something I can write off my taxes.

Chad: Right, right. That is not a deduction. That is, and it’s not a fee either. It’s still your dollars just going from one account into the insurance company.

We’re going to be investing just the same.

Patrick: Good. So is there a revenue number that sort of makes sense on the low side to, I doubt there’s a high side on, on self insuring, but, uh, just thinking about some of our listeners that their business might be growing. Is there a threshold that this starts to make sense for clients?

At a certain level where, yep, I should go start looking into my captive. Or is it something?

Chad: um, yeah, we get that question quite a bit. So it’s really looking at it from an insurance perspective and then I’ll touch on the revenue side of it. One, do I have huge deductibles that I need financial help on or want to be able to put money aside on?

Two, do I want to self-insure some aspects of my business?

Three, do I pay a ton in premium and I want to, um, set up a captive to take on some of that risk and get savings.
Those are kind of your three categories. But that doesn’t really matter from a revenue perspective, but where revenue does going to play more is, Hey, I want to self-insure for some of these other risks that are more risky to me.

The reason revenue comes into play is that say, you have a listener that, hey, we have a lot of key contracts that worry us if we were to lose one of those. And all of a sudden our net income goes to zero on that contract, we have a policy that helps cover you to cover your expense to replace it, to cover the loss of net income for that stretch, whatever it may be, or hey, we’re in a highly regulated environment, regulatory change or administrative actions, there’s a lot of oversight, someone comes in and issues us a huge fine, um, we’ve seen that with like long term care facilities, they’ll get times $16,000 fines, Those are things where we can have a policy in place to cover for settlement amounts, fines, dealing with it, all of that.

So, if they’re saying, I want to structure a captive to cover for these risks that are out there, well, that’s fine. But if you’re only doing a hundred thousand dollars in revenue, that’s extreme. There’s not enough premium to be generated to make any sense to do that. So, while we don’t care as much about revenue and what the person’s making, it makes no difference to us other than having money available to do it.

The revenue does drive a portion of how much premium is generated. And if there’s not enough can be generated to support covering a loss. Then there’s no point in doing it. So with that being said, the revenue does make a difference on that side of it. So, you know, anyone that’s doing about $7 million or more in revenue, it can sometimes be a little bit less if there’s a specific line of coverage that really drives a lot of that income of your business.

That could cause, um, for there to be more premium driven behind it. But otherwise, you know, $6, $7, $8 million and up is really more the sweet spot. Um, where it can start to make more sense to cover for those other lines of coverage. So that when they actually see their pricing, enough premium is generated. Uh, before it can make actually any sense.

Patrick: Great. Thank you. So, I think one of the questions too, that we come across is what happens if I sell my business? What do I do with this, this captive insurance company now that, you know, the entity that it was insuring is, is no longer around. How do we handle that?

Chad: Yeah. So, it can’t be considered an asset of the business that can be sold with it.

You can get a little messy from that perspective and ownership and making sure next ownership understands what risks are taking on and so on. So, that doesn’t happen as often. So otherwise, you’re likely just going to shut down that company. We would work with the next owners to make sure they understand, hey, here’s what they were doing and what they were covering for, for the deductibles or their self-insuring this aspect of the business, or hey, we had a warranty program built out or whatever it was.

And we can set up a new captive to work with them. But with the existing captive, we would likely just will shut that down, um, and work with the regulars to get that part of it done. Follow the file attach returns. And disperse the money back to the owners as a distribution. That’s typically the cleanest way that it’s done.

Patrick: And since it’s a C Corp and that money’s sent out of the C Corp, is that taxed at the dividend rate then? Or is that, is that typically how it’s done? Yeah.

Chad: So, it comes out long term capital gain rates, um, either through the form of dividends throughout the years or qualified dividends coming out or taxed as such.

Or liquidation of the C Corp, um, at shutting it down, which is also taxed at the long-term capital gains rates when the dollars run out.

Patrick: And is it possible to take that C Corp and just turn it into like an investment company where I just hold investments and, uh, maintain it that way? Is that something you see?

Chad: There’s a law firm that we work with that can help with that, where you can, um, we decommission everything as a true insurance company. And then it moves into being an investment C corp. It rolls that way. You have to follow all the rules, which I’m not super familiar with, but there’s rules involved with how you invest those dollars and what’s taxed and so on after that, what has to be pulled out every year.

But yes, that can roll into just be an investment C corp, as opposed to dispersing the money back to the owners and paying the tax on it that way.

Patrick: So, this has been really, really good. I appreciate the deep dive into captive insurance, how it works from both the risk mitigation perspective, and then also looking at some of the other benefits that we receive, you know, from the tax perspective is always, always kind of nice to pay attention to.

Is there anything else from your perspective we should talk about before we wrap up about captive insurance?
Chad: No, I don’t think so. I think you put on a lot of the good things and a lot of things that most people ask us, uh, I think just. Typically, the last question you get is, well, who’s a good fit? Who should really consider it?

So, I’m going to hit on it a little bit today again, but I’ll just say, if you have significant deductibles or retentions, if you’re paying a significant amount in insurance and premium, not a lot of claims, or, hey, we want to build out some program for, to insure for this thing that we don’t currently have.

Um, our warranties that we offer on our products or subcontractor performance, or we have these other different lines of coverage that we’re considering taking on, or self-insuring a decent amount of our insurance package. We currently have all of those are reasons to potentially consider setting up a capital from a risk mitigation perspective, and we’re happy to answer any questions.

There’s never any dumb questions. Gap is a big buzzword with such a hardening market. Um, and most just don’t understand what’s, what are options and what’s available, so we’re happy to help out there.
Patrick: Fantastic, and Chad, I just want to say from our perspective at our firm, all of the captives you’ve worked on with us, you’re really responsive.

You do a great job answering clients questions in a way that you speak in everyday language. So, I absolutely appreciate that. And then maybe most importantly is you just do excellent work. Uh, we don’t have to worry about things falling through the cracks or things not getting done when they’re supposed to be done.

You try to do that.

Chad: Yeah, we try to do that. So, we pride ourselves on, so we at least try to do that. So, thank you.
Patrick: Yeah, my pleasure. Well, thank you, Chad, for, for joining us today. I appreciate all of your insight and, I’m sure we’ll be talking to you soon.

Chad: Okay. Thank you so much for having me. I appreciate it.

Patrick: As always, thank you for joining us and don’t forget to rate and review our podcast wherever you listen to your episodes.

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