A captive can be designed to cover specific, non-traditional risks unique to your business that traditional insurers may not cover, providing tailored risk management solutions and direct financial benefits from premiums saved. Knowing tax-deferred surplus funds are set aside for whatever comes in the future is a great way to sleep better knowing your risk mitigation strategies now address ALL your greatest risk concerns rather than rolling the dice on self-insuring with operational cash-flow.

For 831(b) captives, the IRS allows insurance premiums up to $2.8 million annually (as of 2024). Plan Administrators will typically allow up to 10% of Company gross revenues up to the IRS limit. All captives must have sufficient premiums to cover the insured risks and demonstrate risk transfer. The basic rule of thumb for when it makes most sense is at least 5 years in business, and at least $3.5M in gross annual revenues. Most frequently, business owners keep traditional insurance and add to it.

This varies significantly based on the claims history, risk management practices, and the types of risks insured. As a “for profit’ enterprise, well-managed captives often retain a significant portion of premiums as surplus.

Safe Habor advisors are risk experts, not tax experts. When describing the taxation of premiums paid into an 831(b) captive insurance company, it's more accurate to say that “the premium payments” are "tax-deferred" rather than "tax-free." This terminology reflects that while the premiums paid to the captive are not taxed, they may be subject to tax when profits are distributed or in other circumstances. The investment income earned by the captive can be subject to taxes. When profits or dividends are eventually distributed to the owners, those distributions are taxed according to applicable tax laws, usually at long-term capital gains rates. Therefore, using "tax-deferred" correctly indicates that taxes are not eliminated but postponed until a future event triggers a tax liability. When you have any sort of tax question it is essential to have a competent tax advisor in your corner to answer them.