The podcast discusses captive insurance, including who it is for, how to evaluate a good plan, and setting premiums. It explores the benefits and importance of captive insurance for business owners, particularly in managing risks like supply chain, brand protection, and cyber threats. The requirements for being a trusted advisor in a brokerage account are also discussed, along with investment options and diversification within an S&P 500 index fund. The podcast concludes by exploring captive insurance as a tool for risk management and tax strategies.
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Quick takeaways
Captive insurance allows small to mid-sized businesses to self-insure risks traditionally not covered by insurance carriers, providing potential tax advantages through the 831B plan.
Doctors can use captive insurance to self-insure business risks like malpractice insurance and cyber risk, converting ordinary income into capital gains and benefiting from tax advantages.
Captive insurance plans require careful management of funds, including proper investment strategies and adherence to legal requirements, while providing business owners with a way to set aside funds for risks and retirement.
Deep dives
What is Captive Insurance?
Captive insurance refers to the practice of self-insuring risk by forming an insurance company owned by the insured. Large companies have been using captives for a long time to self-insure risks that traditional carriers won't cover, such as product liability. In recent years, the concept has been extended to small to mid-sized businesses through a tax code provision known as the 831B plan. This plan allows businesses to expense premiums at the operating company level, creating tax advantages. The money put into the plan stays tax-deferred until it is used for retirement or other qualified purposes. The premiums are based on a percentage of the business's gross revenue, with a cap of 10%. The excess risk that is self-insured can include various types like cyber risk, brand protection, dispute resolution, and business interruption.
Benefits of Captive Insurance for Doctors
For doctors, forming a captive insurance company can provide a way to self-insure business risks that aren't covered adequately by traditional insurance policies. By putting premiums into an 831B plan, doctors can benefit from potential tax advantages by converting ordinary income into capital gains and allowing funds to grow on a tax-deferred basis. The premiums can cover risks like malpractice insurance, cyber risk, supply chain risk, and political risk, depending on the specific needs of the practice. The premiums are capped at a percentage of gross revenue, ensuring an affordable level of funding while mitigating exposure to risk. It's essential for doctors to evaluate their specific risk profiles, including those related to reputation, brand protection, and compliance, to determine the ideal level of coverage and premium allocation.
Managing the Funds in a Captive Insurance Plan
Once the premiums are placed in an 831B plan, the funds can be managed in accordance with an investment agreement signed by the insured. The reserves, which consist of the premiums at risk for potential claims, are generally kept liquid and managed by financial advisors or held in accounts at financial institutions. The surplus, which consists of premiums that have not been paid out through claims, can be invested more aggressively based on the insured's risk appetite and investment goals. However, there are certain limitations and regulations to ensure the funds are properly managed and meet legal requirements. While financial advisors can provide guidance, it's important for insured individuals to understand the rules and restrictions associated with their specific captive insurance plan, including diversification guidelines and restrictions on non-traded securities.
Benefits of owning an 831B plan
Owning an 831B plan should be as common as owning a 401K for business owners. With the uncertainty of government bailouts and traditional insurance carriers not covering certain risks, business owners need to set money aside to pay for these risks. The 831B plan allows business owners to set aside funds for potential risks while also providing a retirement plan. The plan incentivizes business owners to save money, which is not often the case in the business world.
Ensuring legitimacy and avoiding scams in captive insurance
When considering a captive insurance plan, it is important to ensure legitimacy and avoid scams. Background checks on managers and understanding the four-part test of captive insurance can help determine if the plan is legitimate. The four parts of the test include transfer of risk, risk distribution, fortuitous risk, and operating according to the principles of insurance. It is crucial to have a defined claims process, participate in a distribution of risk, and work with qualified risk managers. Avoiding managers focused on tax mitigation rather than risk reduction is also essential.
Today we are talking with Van Carlson of SRA 831(b) Admin all about captive insurance. We talk about who captive insurance is for, how to evaluate a good plan, how much capital a captive should have, and how to set premiums. We discuss how this can be a great risk management strategies with some tax benefits as well as how to avoid a bogus risk pool. There is a lot of great information here on a topic we were excited to learn more about.
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