Reduce Costs, Plan Your Estate and More With a Captive Insurance

Specifically, captive insurance can help your business clients potentially greatly lower their insurance costs, have more control in managing their insurance, and obtain coverage that might otherwise be unavailable or not affordable. Some forms of captive insurance allow an insured or its assign to maintain an ownership interest in the underlying insurance company. As with any successful business, an owner of a captive can work with his or her advisers to best manage their insurance company. Another potential benefit is that of business and estate planning.
This author stresses that a captive should never be formed unless the primary reason is business purpose. Captives should never be marketed by advisers as “wealth management” or “estate planning” tools. In fact, improper marketing of an otherwise compliant captive can lead to the loss of the captive’s tax status as an insurance company, resulting in taxation and penalties of nearly one hundred percent of premiums.
Yet it is a fact that a successful captive may be useful in business and estate planning. Ownership of a captive may be facilitated by a partnership or trust which is owned, controlled by, or benefits a business owners’ descendants.
As an example, suppose that a business owner (Senior) wants to establish a captive insurance company in order to lower his insurance costs. The insurance company could be owned by a generation skipping trust currently controlled by Senior’s children. The captive’s premiums must be actually verifiable and the coverage must be wholly justifiable. The insurance sold by the captive needs to comport with all relevant statutes from both a regulatory and an IRS standpoint. If the captive’s claims are less than actually anticipated, it may have retained earnings or profits. Depending on the type of captive insurance company, the tax rate levied on underwriting profits can be as little as zero percent. Over time, the insurance company’s profits may be distributed as capital gains, dividends, or even loans to the beneficiaries of the insurance trust. The captive could even provide a funding source for future business opportunities.
The ultimate effect of a compliant and successful captive could be to transfer a portion of the pre-tax premiums from Senior’s business over to Senior’s children, grandchildren, etc., without income, gift, or estate tax. The bottom line for any accountant or wealth adviser is that captives should be looked at as a way to garner significant insurance cost savings with a possibility of secondary benefits.
Again, the author cannot overemphasize the importance that the captive must be designed to and operate as a compliant insurance company. The company must have real losses, real exposure to third party risk, and cannot be in any way an alter ego of or a savings account for the business owner.
Captives can be a tremendous tool helping businesses lower their insurance costs. This author has seen an example of businesses saving millions of dollars in a few short years by properly using captives.
Equally stunning, however, are the adverse tax consequences of an improperly marketed or managed captive. The advisory team chosen for this type work should have many years of captive insurance experience and, ideally, should be supported by a large regional or national law firm.

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Using Captive Insurance Companies for Savings

Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.
Often, they are starting what is called a “captive insurance company” – an insurer founded to write coverage for the company, companies or founders.
Here’s how captive insurers work.
The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays re-insures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.
In the event of a loss, the business pays claims from its captive, or the re-insurer pays the captive.
Captives are overseen by corporate boards and, to keep costs low, are often based in places where there is favorable tax treatment and less onerous regulation – such as Bermuda and the Cayman Islands, or U.S states like Vermont and South Carolina.
Captives have become very popular risk financing tools that provide maximum flexibility to any risk financing program. And the additional possibility of adding several types of employee benefits is of further strategic value to the owners of captives.
While the employee benefit aspects have not emerged as quickly as had been predicted, there is little doubt that widespread use of captives for employee benefits is just a matter of time. While coverage’s like long term disability and term life insurance typically require Department of Labor approval, other benefit-related coverage’s such as medical stop loss can utilize a captive without the department’s approval.
Additionally, some mid-sized corporate owners also view a captive as an integral part of their asset protection and wealth accumulation plans. The opportunities offered by a captive play a critical role in the strategic planning of many corporations.
A captive insurance company would be an insurance subsidiary that is owned by its parent business (es). There are now nearly 5,000 captive insurers worldwide. Over 80 percent of Fortune 500 Companies take advantage of some sort of captive insurance company arrangement. Now small companies can also.
By sharing a large captive, participants are insured under group policies, which provide for insurance coverage that recognizes superior claims experience in the form of experience-rated refunds of premiums, and other profit-sharing options made available to the insured.
A true captive insurance arrangement is where a parent company or some companies in the same economic family (related parties), pay a subsidiary or another member of the family, established as a licensed type of insurance company, premiums that cover the parent company.
In theory, underwriting profits from the subsidiary are retained by the parent. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the U.S. and in certain parts of the world have adopted a series of laws and regulations that allow small non-life companies, taxed under IRC Section 831(b), or as 831(b) companies.
Try Sharing
There are a number of significant advantages that may be obtained through sharing a large captive with other companies. The most important is that you can significantly decrease the cost of insurance through this arrangement.
The second advantage is that sharing a captive does not require any capital commitment and has very low policy fees. The policy application process is similar to that of any commercial insurance company, is relatively straightforward, and aside from an independent actuarial and underwriting review, bears no additional charges.
By sharing a captive, you only pay a pro rate fee to cover all general and administrative expenses. The cost for administration is very low per insured (historically under 60 basis points annually). By sharing a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires little or no maintenance by the insured and can be implemented in a fraction of the time required for stand alone captives.
If done correctly, sharing a large captive can yield a small company significant tax and cost savings.
If done incorrectly, the results can be disastrous.
Buyer Beware
Stand alone captives are also likely to draw IRS attention. Another advantage of sharing a captive is that IRS problems are less likely if that path is followed, and they can be entirely eliminated as even a possibility by following the technique of renting a captive, which would involve no ownership interest in the captive on the part of the insured.

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Pay Yourself Over $10,000 a Year – 8 Tips to Build Your Foundation of Savings for Your Success

Have you saved any money for emergencies? How much have you saved in case you were laid off? Do you compile credit card debt instead of using your savings for emergencies? Do you have a problem with saving money vs. spending it? Have you tried it on your own and not been successful? Do you know there must be a better way?
Do you find it frustrating when you see other people having financial success? Wouldn’t you like to be one of those who don’t struggle and experience tremendous financial success? Don’t struggle any longer. Here are your 8 tips to build a solid foundation of savings for your future success.
Write every purchase and deposit in your check register when it occurs. Be prompt. This way your checkbook and funds available balance is always current and accurate. You cannot overspend and you are aware of your balance. You won’t ruin your budget because it is current.

Balance your checkbook weekly with your online bank register. Correct any errors in your check register such as missed entries. Add a check mark next to the balance amount on the date so you know where you were most recently accurate. Check the entries that have posted and keep this current.

Use your credit cards if you need to and only if you are able to easily pay the complete balance by the end of the month or statement due date. You won’t incur any late fees or interest fees if you completely pay the balance early and on time.

Withdraw $200 every week with an automatic transfer to a money market account – and do not use those funds unless there is an emergency. Act as though you were making a car payment and that money is gone and unavailable. Be disciplined and strong here. This is where you are paying yourself over $10,000 per year ($10,400 specifically).

You can increase this incrementally by adding as little as another $50 per transfer adding another $2,600 per year for a total annual savings of $13,000 per year. This is your gift to you. Impressive!

Next, deduct all of your regular expenses for this pay period right away in your check register and mark the actual date this will occur for each item.

You are predicting your future budget here. This will give you an accurate financial picture of your available balance for the pay period and incidental expenses. We often imagine we have more available than the reality exposes.

Watch your money market balance grow each week and enjoy the satisfaction in knowing that you are a saver – not a spender. It doesn’t take any discipline at all to spend money, and it takes a great deal of strength to save it.

Be powerful. Pay yourself first – over $10,000 per year and build your solid foundation of savings for your future success. You can do it. Be strong.

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Why Should You Bank Online With Your Credit Union?

The Internet has changed the way everyone lives and communicates. But it’s so much more than keeping in touch with your family and friends. It can also be used to simplify your financial life. It is a welcome change from the monotony of balancing your checkbook and correcting those antiquated handwritten ledger pages. With online banking at your fingertips it gives even the most dyed-in-the-wool paper trail junkie the opportunity to abandon ship and embrace the digital age and utilize online banking.
Banking online isn’t a new phenomenon and likely the majority of us already do it in one way or another. If you haven’t yet made the transition to online banking and are still searching for more information about the benefits, I’ve put together a list of reasons why you should consider using the Internet to manage your finances.
Bank at your convenience by managing your accounts on your schedule, 24/7. The only thing you need is your computer, tablet or a smartphone with Internet access.
Everyone has experienced his or her financial institution making an error and it’s not always in your favor. Or, I’m sure you have recorded a check incorrectly allowing the payment to fall through the cracks. The beauty of online banking is it allows you to monitor your account balance and pending transactions in realtime. And, since every transaction is recorded, it is possible to go back months to make sure every transaction has been recorded correctly.
Have you ever been late with a bill or has a payment gotten lost in the mail? Paying your bills online is simple, fast and very secure. Just check with your credit union and set up online bill pay.
It’s no longer necessary to wait for your paycheck to land on your desk. Just arrange for direct deposit online so you have immediate access to your money. It may be exciting to see that check up close and personal but the time you save waiting in line at the bank to make a deposit will make up for it.
Do you have people in your life, like kids in college, that need a cash infusion right now? Online money transfers make it easy to send funds wherever they need to go – fast and easy and most of the time free. And, if you have multiple accounts, online transfers give you the convenience of moving funds as needed.
Bank-on-the-go with online banking. Make a deposit, transfer funds or even deposit a check while you are waiting in line at the grocery store.
Go paperless with eStatements. Save time. Save money. Save a tree! Environmentally conscious and security-minded people are choosing to receive eStatements in place of traditional paper statements that can be accessed within their personal online banking from anywhere, anytime.
MoneyDeskTop by MX is designed to put a member’s data on center stage, molding it into a cohesive, intelligible and interactive visualization. MX provides access to a personal financial management software program whereby online banking becomes a “hub” of financial activity. Users aggregate accounts from any financial institution allowing members to track spending, create budgets and manage debt.
Do you want to have a check-free life? With online banking it’s easy to pay people and get paid easier faster and cheaper than using checks.
Be assured that your personal information is protected with online banking. Credit Unions typically use highly sophisticated encryption devices to ensure their members privacy and safety.
Additionally, many credit unions allow their members to apply for accounts, order checks, stop payments, apply for loans and even communicate with them online. Consider all the benefits of having an online relationship with your credit union.

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