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Captive Insurance Companies

Copyright 2006

The Wealth Preservation Institute378 River Run Dr.

St. Joseph, MI 49085269-408-1841

www.thewpi.org

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What is a Captive?

• General Definition:– “An insurance company owned and controlled by its

policyholders.”• A Captive is one of many principal arrangements

by which an organization can finance deliberate retained risk.

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Typical Captive Structure

Business 1 Business 2 CaptiveInsuranceCompany

Owner

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Why are Captives Formed?

• Primary insurance companies typically wish to only retain the predictable levels of risk and “cede” or transfer unpredictable levels of risk to others (reinsurers).

• A CAPTIVE allows an insured to assume the benefits normally enjoyed by a primary insurer.

Insurance is the Biggest Concern of SmallBusiness Owners• Over the past few years, business owners have

experienced skyrocketing insurance costs.

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Worries of the small employer

Regulations11%

Competition9%

Labor Qlty.8%

Taxes17%

Poor Sales16%

Labor Costs5% Inflation

1%

Insurance28%

Credit/Int. Rates1%

Source: National Federation of Independent Business (November 2003); Insurance Information Institute

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What are the benefits of a CIC

• Puts the Control of your insurance program in your hands• Reduce Taxes• Build wealth• Estate planning• Reduced operating cost • Improved cash flow • Cost-effective mechanism for risk retention• Availability of special coverage • Enhanced risk management perspective • Direct access to the reinsurance market• Writing unrelated risks for profit • Stable marketplace• Improved services• Continuity of risk management operations

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Purpose of a Captive

• To begin, let us be clear that captives are all about money.

• Clients want one to make money. • It will cost money to have one and clients who

have one will pay their own losses, when and if losses materialize.

• Captives are another method by which risk of loss is financed.

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Structuring a Captive

• First of all, the premiums paid must be sufficiently large to gain economic advantage. $250,000 for a 501(c)(15) and $300,000 annually for an 831(b).

• Second, clients must be able to pay the claims, and secure the future losses.

• Third, clients must recognize that a captive is a business separate and apart from their other business, no matter what structure is ultimately selected. (Which means a client must pay attention to running the captive or like any business it will not perform well).

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Costs

• The costs to establish a group captive are typically higher than a single parent captive. Range of fees could be from $30,000 to $250,000, depending on what the client is planning to do.

• The average price for a small singe parent captive should be less than $50,000; the bulk going toward actuarial, consulting, regulatory and legal.

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Captive Advantages

• It can reinsure traditional lines such as workers compensation, general liability, auto liability, product liability and professional liability.

• A captive can also be used to provide coverage and limits not available in the market, such as credit risk and terrorism and Medicare fraud for physicians.

• The captive can provide a “tax-sheltered”approach to large retentions.

• There can significant personal tax advantages that can be obtained with a captive.

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Captive Structures

• Single parent• Group/association/RRG• Rental captives, Segregated protected cell• Common Characteristics.

– One of these is the participation of a risk sharing partner, or traditional insurer.

– Risk sharing partners provide such necessary and desirable services as certification of coverage and limits; reinsurance; loss control and mitigation; claims reserving, adjustment, and oversight; risk management; underwriting and regulatory response and assistance.

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Single Parent Captive

• The single parent captive is still the most prevalent structure in use today.

• This is an insurance company owned by one company, usually the insured.

• This form has been in use for over 50 years, and has stood the test of time and challenge.

• A single parent captive is most often used to provide coverage either directly, where permitted, or as reinsurance of a traditional primary insurer.

• It is frequently used for reinsurance on workers compensation programs as well as for property insurance, directors and officer’s liability, terrorism, and toxic mold.

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Income Tax Reduction

• The IRC provides certain tax advantages to insurance companies depending on the amount of premium income received.

• Large Insurance Companies - Insurance companies with annual premium income of more than $1.2 million are allowed to deduct reserves for losses even though payments of claims might be five to ten years in the future.

• The insurance company pays tax on its net (premium and investment) income at ordinary C-corporation rates.

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Tax reduction continued

• Small Insurance Companies - Insurance companies with annual premium income of less than $1.2 million can elect to be taxed only on investment income.

• Premium income is tax free. However, investment income earned on the funds held inside the insurance company is taxable at ordinary C corporation rates. (Internal Revenue Code section 831(b))

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Example of an 831(b)

• Sam (a real estate investor and business owner) sets up a CIC.

• Sam raises the deductible on his current insurance policies and insures the new higher deductible with his CIC. His traditional premiums are lowered by $50,000.

• With the CIC in place, Sam’s companies buy new insurance coverages include business interruption, terrorism, employment practices and fire damage to his tracts of timber.

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Continued

• Sam’s new premium to the CIC is $450,000 (which his businesses can write off).

• The CIC does not pay income tax on the premium received.

• If Sam is in the 40% tax bracket, he just saved $180,000 in taxes, and

• Sam paid the $450,000 into his personally owned CIC.

• The income in an 831 captive is income taxed at the corporate rate.

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Tax reduction continued

• Very Small Insurance Companies - Insurance companies with gross receipts of less than $600,000 and premium income representing more than 50% of the gross receipts - premium income and passive investment income are free of federal income tax. (Internal Revenue Code section 501(c)(15))

• In calculating the gross receipts limitation, clients must include the gross receipts of other business that are within a controlled group

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Law Changes

• The Pension Funding Act of 2004 was passed and it had a negative affect on Sections 501(c)(15) or 831(b) captives.

• Under prior tax law, a property and casualty insurance company was exempt from federal income tax if the greater of net or direct written premiums was $350,000 or less.

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Estate Planning

• In our Sam example, if Sam’s daughter owned the CIC, Sam would have shifted significant wealth to the daughter gift and estate tax free.

• In this example, the total potential tax savings for paying $450,000 into a captive insurance company could be as much as $400,500. The breakdown is as follows:

$400,500.00Total

220,500.00Estate tax savings

$180,000.00Income tax savings

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Example 2

3,822,0002,058,000 294,0001,470,000Five Year Total

3,822,000764,400411,60058,800294,000840,0002009

3,057,600764,400411,60058,800294,000840,0002008

2,293,200764,400411,60058,800294,000840,0002007

1,528,800764,400411,60058,800294,000840,0002006

$764,400$764,400$411,600$58,800$294,000$840,0002005

CumulativeTax Savings

AnnualPotential Tax

Savings

PotentialEstate Tax

Savings @ 49%

State TaxDeduction

@ 7%

Federal TaxDeduction @

35%

AllowableRelated Party

InsurancePremiumsYear

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Where do you make your money?

• If you manage money, you will manage the money of your client in the CIC.

• If you sell life insurance, there are numerous ways to buy life insurance in the CIC.

• If you are an attorney, you can share in the legal fess to set up the CIC.

• If you are an accountant/CPA, you can do the accounting work.

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Asset Protection

• Captives are NOT asset protection tools• Having said that, assets in a Captive are asset

protected from creditors of the owners of the captive.

• Many are offshore which provides additional asset protection.

• Domestically, insurance company laws are in place to protect policy holders which helps protect reserves in a captive.

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Summary

• While captives are not an every day topic for most of an advisor’s business clients, it is one that can be very beneficial when used for the right client.

• The CWPP™ and CAPP™ programs revolve around educating advisors matters that can benefit the high income/net worth client and in order to be a full service advisor to business clients, it is essential to have a working knowledge of captive.

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C.A.L.M.Comprehensive

Asset & Liability

Management

The Wealth Preservation Institute378 River Run Dr.

St. Joseph, MI 49085269-469-0537

www.thewpi.org

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What is C.A.L.M.

• Fundamentally speaking C.A.L.M. is a sales platform for advisors looking to:

• Market to high income/net worth clients. (C.A.L.M is a great door opener)

• Be unique in their local marketplace.• Really be able to show a benefit to clients vs. just selling

the garbage “gurus” are selling today.• Be compensated when a client purchases the platform

(compensated the right way when most are being paid for the unauthorized practice of law).

• Create long lasting relationships with wealthy clients.• Sell more insurance and annuity products through

advanced sales (if you are licensed).

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Four (4) Levels of C.A.L.M.

• Level 1-Client pays $495, fills out a client questionnaire and receives a 3-6 page summary of his/her asset protection, estate planning/tax planning, and financial planning problems (and the potential solutions).

• If the client purchased such a summary from an estate planning/asset protection expert billing hourly, it would cost approximately $1,500,

• This summary is created either by me or by the selling advisor IF the advisor is a CWPP™ or CAPP™ advisor (in which case it would be reviewed by me before going to the client).

• Client receives e-newsletters for a year and access to educational webinars.

• Client receives discount on legal fees from “approved”attorneys who understand the topics covered in the CWPP™ and CAPP™ courses (team member attorneys).

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Continued

• Level 2• Revolves around the bread and butter domestic asset

protection tool, the LLC or FLP.• Clients who buy level 2 will be charged $2,000. They get

the benefits of level 1 and one (1) FLP or LLC to be used and funded for their asset protection plan.

• An approved attorney will create this FLP or LLC.• The client understands that an FLP or LLC created by the

national guru’s would typically cost $2,500-$3,500.• Therefore, Level 2 is a discounted legal fee concept with

real value monetarily and in the form of an approved attorney who actually knows what he/she is doing.

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Continued • Level 3• This level is for clients who also want help with putting their

financial, estate and tax plans together.• Level 3 is an A-Z platform where a client fills out a

questionnaire (60+ questions) and where a 30-60 page report is given to the client.

• The goal is to get a client to critical capital mass (can retire anytime without the worry of money) and have as little estate tax consequences as possible. (Done with topics from the CWPP™ course).

• The normal cost of such help is $10,000-15,000, clients through C.A.L.M. can buy Level 3 for $7,500.

• This is a key level for financial planners and insurance agents because out of this level will come significant product sales which fit properly in the client’s plan.

• Level 3 will create a lasting relationship with any client.

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Continued

• Level 4• This level is based off the golden rule: When assets are in

an offshore asset protection trust, the gold is protected from any creditor.

• Any client with $500,000+ in liquid assets should have their money protected in an offshore asset protection trust (OAPT).

• Normally these trusts run $20,000-$50,000. • Through C.A.L.M. clients can purchase one for $15,000.• Plus the team members who setup these trusts are the

best of the best in the industry with ethics (unlike most of the advisors setting up these trusts).

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Continued• Level 5 is for clients with a net worth of

$15,000,000 or more and will include for them an A-Z estate plan done by the top law firms in the country. This kind of planning at many “downtown” firms costs $50,000-$75,000+. Level 5 is designed for the majority of $30,000,000 and blow clients with typical fact patterns and the cost for a complete estate plan will cost $35,000.

• Level 5 includes burning all of the client’s legal, accounting and financial documents to disc and to a hard drive on secure server.

• Level 5 will be overseen by The WPI educational board member, Jarrett Bostwick, JD, LLM. Jarrett is listed by Worth Magazine’s one of the top 100 estate planning attorneys in the country and formerly directed the Advanced Wealth Design Center for National Financial Partners (NFP).

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Continued

• With all levels the client also receives– Alternate Dispute Resolution tools to help mitigate

future claims through forced mediation or arbitration.• Forms• Processes

• With all levels, advisors will be compensated without violating the rule that non-attorneys can not be compensated for legal referrals.

• A key to the C.A.L.M. plan is credibility which comes from The WPI and its founder and unmatched educational board.

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Why should you use C.A.L.M?

• It will be a great client gathering tool.• Asset protection is a hot topic and with good

education of your clients, they will see the value and want help.

• Having a comprehensive and professional asset protection sale’s platform with teeth and real benefits is absolutely unique in this industry.

• The WPI is really the driving force behind making sure that the C.A.L.M. platform is always client first in its approach.

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Continued

• For insurance licensed advisors, the C.A.L.M. plan is a way to sell life insurance an annuities to clients when it fits in their recommended plan.

• For security licensed advisors, the C.A.L.M. plan is a way to be the money manager of current clients for a long long time and a way to pick up new money to manage when selling C.A.L.M. to new clients.

• For attorneys, C.A.L.M. is a great way to generate legal fees. C.A.L.M. is a way to motivate clients (new and old) to take action on asset protection and estate planning legal work.

• For non-licensed CPAs, it is a way to show more value to your client (new and future) and a way to pick up more hourly business (tax returns).

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Continued

• Don’t forget that when you sell a C.A.L.M. plan (Levels 1-4) you will receive a check for a portion of what the client paid for their C.A.L.M. plan.

• Plus you get to have input and will be the one presenting the recommendations from C.A.L.M. (therefore, you will be seen as the valued advisor for you clients who purchase C.A.L.M.)

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Summary

• C.A.L.M. is needed by all high income/net worth clients.• C.A.L.M. is a unique process that is patent pending

(meaning there is no other one like it out there and won’t be anytime soon).

• C.A.L.M will make you more credible and unique in your marketplace (meaning it is a great client gathering tool).

• C.A.L.M. will significantly improve your ability to earn more money whether it be through product sales, money management, or from hourly legal or accounting fees.

• If you are not using C.A.L.M. to help your client you are missing out on a golden opportunity to help your practice, your clients and earn more money in the process.

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Questions?For more information on how you can start

selling the C.A.L.M. plan, please e-mail info@thewpi.org269-408-1841

You can visit the C.A.L.M. web-site at http://clslegalplans.net/page/sqr6/CALM___Asset_Protection.html

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Overview for the Professional Designation:

CWPP™(Certified Wealth

Preservation Planner)

The Wealth Preservation Institute378 River Run Dr.

St. Joseph, MI 49085269-408-1841

www.thewpi.org

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What do Advisors want?

• To earn more money?• To have more knowledge than other advisors?• To provide better advice to clients on multiple

topics?• To be more credible than other advisors?• A team of advisors for support and back office

when dealing with “advanced” planning.• The ability to market to CPA, Attorneys and

physicians through continuing education credit.• Are these of interest to you?

– If so you are a candidate to become an APP™ or CWPP™

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The WPI and CWPP™/APP™

• What is the Wealth Preservation Institute (WPI)?– The only educational entity in the country devoted to

provide education on “advanced” planning (asset protection, tax and estate planning)

– The only entity in the country focusing on topics that apply mainly to the high income/net worth client.

– Certifying entity for the CWPP™ designation.• The CWPP™ course is a 24 hour certification

program which can be taken all online or in person.• The Asset Protection Planner designation is for

those simply want to deal with AP (12 hours).

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Marketing

• The WPI helps is certified advisors market in two several very unique ways.

• 1) The ability to become an instant author through a 340+ page “ghost book.” You can read the table of contents at http://www.thewpi.org/newindex.php?dept=51&pid=495

• The WPI will allow CWPP™ advisors to give CPE continuing education courses on a local level to CPAs and accountants.

• The WPI has a number of articles that CWPP™ advisors can use to place in local medical, accounting, legal and other business journals.

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Topics• What topics are covered in the CWPP™ course?• Asset protection (3 hours)

-Domestic-Offshore

• Deferred Compensation (4 hours)-WealthBuilder® Annuity; Traditional NQDC and the Leveraged Bonus Plan®-Qualified plans/412(i) plans-ESOPs-IRAs

• Business Planning (6 hours)-Account Receivables (A/R) Leveraging -VEBAs and 419A(f)(6) Plans -Section 79 Plans -Closely Held Insurance Companies -Corporate Structure

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Continued• Estate Planning (8 hours)

-Basic-“Advanced”- Life Insurance -Premium Financed Life Insurance - Medicaid Planning -Qualified Pension Insurance Partnership®

(Mitigating the 75% Tax Trap) -Charitable planning-Long Term Care Insurance

• Personal Finance (4 hours)-Annuities -Life Settlements -Reverse Mortgages -Private Annuity Trust

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Next Seminar?

• The next in person seminar is in Vegas on June 5-7, 2006.

• The course can be taken completely online.• Check the CWPP™ web-site www.thewpi.org for

posting of when the next in person seminar will take place.

• Group discounts. If you have 5 or more advisors who want to take the course, please contact The WPI for information on course discounts.

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Questions?www.thewpi.orginfo@thewpi.org269-408-1841