Conceptual business illustration with the words captive insurance

Captive Insurance for Dummies: Why You Need Captive Insurance

Do you know, the word ‘insurance’ is not defined in the U.S tax code? It’s an interesting quirk to note. But if you’ve grown your business in recent years to a large scale, then you’ll know that insurance is only too real a concept to you – even if the IRS disagrees. 

As a business, you need to make sure you are prepared for every eventuality but at the same time insurance costly and expensive. But there are options you can consider.

Aside from conventional workplace or business insurance you can also consider captive insurance. 

Here’s everything you need to know about captive insurance for dummies.

What Is Captive Insurance?

Captive insurance is where a company has handed a large degree of control of the business over to an insurance company. Indeed, the insurance company may well be the primary or majority shareholders in the company.

It’s different from a mutual insurance company where the policyholders – people who have taken out insurance with the company – have the majority share in the company.  Instead, a small group of executives makes key decisions in the company rather than the chief executives.

It may sound risky, but the Vermont Government has developed the best captive insurance policy overseen by some great state government protections. 

Better Cash Flow

Captive insurance can ensure mitigate the risks in the company which opens up better cash flow revenues. If a third party knows the company is controlled by insurers who are risk-averse they are more likely to invest because they know they are likely to receive a return on their investment. 

With more capital available the company has more leverage and can do more than if it did not a captive insurance policy. 

Better cash flow can lead to a healthier company and creditors paid on time. It could also lead to the remortgaging of certain company assets. This is one of the key benefits of captive insurance. 

Putting Their Money With Their Mouth

Any insurances who agree to take on a so-called captive company are putting their own money at risk. As de-facto executives in the company itself, they are now liable for any financial decisions the company makes. 

An insurance executive with a stake in a captive company will ride the natural ebb and flow of the company: when it succeeds and makes a huge profit so too will the executives and if it starts to lose money the insurers will lose out too. 

Captive Insurance for Dummies? It Is Easy to Understand

Captive insurance is great for those businesses who want to unlock extra cash flow and have insurers on the board of their businesses.

For insurers taking on a captive company, it ensures they can mitigate the risks a company takes. 

In an age when we’re all dealing with the fallout from the coronavirus pandemic taking risks can seem difficult. However, a captive insurance policy removes the barriers some investors fear. Captive insurance could unlock more capital in the business. This could lead to more success in the medium to long term.

If you are interested in reading more generally about captive insurance for dummies or the benefits of captive insurance to your business be sure to check out the rest of our site. 

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