You’re here because you’ve heard about captive insurance models being “scam-like” or because it almost sounds too good to be true. It's almost as though they’re used for sleazy people to get rich.
Business owners like yourself have heard plenty about captives, which creates misconceptions and vilifies this legitimate form of insurance. “Captives will bankrupt you.” “I'm taking all the risk on. How much can I be out of pocket?” “The IRS will fine you and put you in jail.“ And to be fair, these are perfectly okay concerns to have.
The short answer to your question about captives being a scheme: No.
Longer answer: a small amount of bad people have tried in the past to take advantage of captives. While you can profit from the captive model, that isn’t the focus. You’re rewarded for creating more robust safety and risk management programs and doing everything you can to minimize claims.
At ReNu Insurance Group, we’ve helped over 130 businesses become captive owners, many of whom had similar questions and reluctance when moving toward the captive model. We helped businesses understand captive models and the laws and regulations captives follow and reassured them that captives are a legitimate form of insurance.
This article will address why business owners view captives as a scheme, how bad actors try to take advantage of the model, and why business owners now choose to join captives. That way, you can understand the legitimacy of captive insurers and figure out whether they are a good fit for your business.
Why would someone think captives are bad?
Many captive promoters are pushing this out there, but they aren’t licensed insurance professionals. They’re nothing more than wealth managers trying to get assets under management and showing these people how to avoid paying taxes.
That’s a red flag you need to stay away from at all costs, especially when the IRS looks closely at captives as it is.
And if all you’ve heard are good things about captives, they’ll sound too good to be true. While we help businesses become captive owners, we would be lying to you if you didn’t hear the downsides.
You’ll have to invest capital and collateral. You’ll experience one bad year (this happens once every five to six years), and you can be a bad fit for a captive if you don’t create more robust safety and risk management programs. If you don’t do the things to be a good captive owner, it’ll kick you in the crotch and be painful.
Do I have full control of my money once it’s in a captive?
Another misconception about captives is that you can invest your money however you want. Certain captives allow you to do that. Group captives usually don’t since they must ensure claims and expenses can be paid.
The investment portfolio or opportunity you would have is going to limit you to high-quality corporate bonds and government bonds, and you will only be able to take surplus after a few years in the captive. Insurance regulators won’t allow you to invest money into risky things.
Should I be cautious of offshore captives?
No. This long-term insurance solution isn’t like something you would see in The Firm. Though it’s natural to be cautious, especially when the question on your mind is something to the extent of: “Why is the captive offshore? Is it some tax scheme?”
Let’s make it clear: captives aren’t about taxes. Most offshore domicile captives make the 953(d) election, which means the captive is taxed as a US-based corporation.
Offshore-owned captives have existed for decades. It’s taken a while for the US market to catch up. Now, the US market is quickly adapting and getting experts who are more experienced in captives to compete with those offshore.
Regardless, you shouldn’t be too concerned whether your captive is owned on or offshore.
Why do most business owners join captives?
Generally speaking, business owners are honest with their intentions. It’s the minute amount of devious actors that make captives look bad. While profitability is possible when becoming a captive owner, it’s not the primary focus.
Most businesses become captive owners because they’re tired of participating in the traditional market. They pay higher premiums every renewal, even though everything has been done in their power to avoid claims happening.
People are doing good work, only to be “rewarded” with negative outcomes. Market fluctuations push people into captive insurance more than anything else. No matter how much control you or any other business tries to have over insurance, something is always out of your control.
Captives provide more control over premiums. Also, captive owners know exactly where their money goes when paying their premiums. You’re not able to do that in the traditional market.
Becoming a captive owner is a long-term business strategy. While you can profit from joining a captive, it’s not because it’s a “scheme.” You’re rewarded for focusing on safety, creating more robust risk management programs, and minimizing claims. You reap the benefits of your hard work.
Are more businesses joining captives?
Absolutely! More and more businesses are becoming captive owners as the insurance model has piqued more interest. While the captive model isn’t a scheme, it doesn’t mean it works for everybody. It isn’t all roses, and some businesses aren’t a good fit.
That’s why you need to read our article on the general advantages and disadvantages of being a captive owner. It’s equally important that you understand the financial advantages (and disadvantages) of joining a captive.
If you have any questions or are interested in the captive insurance model, schedule a call with ReNu Insurance Group to speak with one of our specialists.
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