Why is this Topic Important to Wealth Managers? Serves as a reminder to wealth managers who may already have, or are currently, considering any alternative risk transfer products for their clients. Discusses basics applied to captive insurance companies in consideration with traditional prepaid expenses.
As we have discussed in previous blogticles, captive insurance can be a viable method to more efficiently protect against certain risks under various circumstances. For discussion on these topics please see our blogticles on AdvisorFYI from the week of August 30th, Monday through Wednesday, Alternative Risk Transfer Basics, Risk and Self-Insurance, and Captive Insurance Company Introduction.
In addition, we have discussed in previous blogticles the ability to deduct prepaid expenses for certain items, both from an accrual basis and cash receipts and disbursements method taxpayer approach. One such class of deductions that is generally allowable is, “insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.” 
See generally our blogticles from November entitled, Year End Tax Planning: Pre-Paid Insurance Expense For Accrual Accounting Taxpayers, and Year End Tax Planning: Pre-Paid Expenses For Cash Accounting Taxpayers.
A discussion of the deductibility of insurance premiums paid to a captive insurance company is complex. It is recommended that wealth managers work with knowledgeable attorneys and other experts who specialize in the field of alternative risk transfer taxation. Nevertheless, there are a number of captive insurance options that “fit” the many rules required for the deduction of premiums as an insurance expense.
Moreover, as the year draws closer to an end, some of those options have become infeasible due to time constraints. Other options, however, still may be available to clients’ businesses that have insurable interests that are currently being uninsured or insured through some other less effective means.
One such example could be the class of captives that is generally known as the group, association or rent-a-captive model. These captive insurance models provide for some of the very same benefits as ownership of an insurance company, which include, but are not limited to:
- individualized underwriting and premium allocations
- retained underwriting profits depending on claims experience
- access to insurance products currently unavailable or too costly to insure
These models can also offer a lower price point for businesses who may be considering using alternative risk transfer products for the first time.
Some considerations wealth managers should account for include, but are not limited to:
- upfront and annual cost to insureds
- jurisdiction and regulatory oversight of insurance company
- officers, directors, and management of company, products and programs
Lastly, there are a number of promoters, companies, individuals and professionals who promote captive insurance products. It is important to realize not everyone knows what they’re talking about. In fact, some are even outright crooks. When consulting with individuals who are “qualified” ask lots of questions and try to verify the information shared with you. Remember a little extra due diligence now can save you a lot in the long run.
Tomorrow’s blogticle will continue to discuss additional resources available to wealth managers.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
 26 C.F.R. § 1.162-1; U.S. v. Weber Paper Co., 320 F.2d 199, 63-2 U.S. Tax Case. (CCH) P 9630, 12 A.F.T.R.2d 5256 (8th Cir. 1963).