Micro Captive Insurance 101: What Is It and How Does It Work?

How much money will your business toss into the trash when it pays insurance and taxes in 2020? 

Over 40% of small businesses rely on personal insurance to protect their businesses. This is all in an effort to mitigate the high costs of commercial small business insurance and the taxes that come with it. 

But there’s yet another alternative. You might have heard the term “micro captive” thrown around on business blogs and articles lately. 

Is micro captive insurance the solution your business has been waiting for? Here’s what you need to know. 

What is Micro Captive Insurance? 

Finance is not an industry of creativity. Naming things is not really of the utmost concern of financiers and economists. 

The word “captive” used with anything that has to do with your money might seem scary. But we promise it isn’t. 

A captive insurance company is a limited-purpose property and casualty insurance company. These types of insurance companies are owned by members under the Internal Revenue Code (IRC) Section 831(b). They only pay tax on investment of income. 

Their premiums are deductible on taxes when they meet the qualifications outlined under the IRC Sections 162.

Micro captive insurance companies also must have an annual net written premium of up to $2.2 million.

How Does Micro Captive Insurance Work?

A micro captive insurance company provides small to medium-sized companies with the capability to self-insure. This allows these types of businesses to protect themselves against many risks that are not protectable with traditional insurance. 

A micro captive insurance policy and premiums are customs made to tailor the unique financial standing and risk of each individual business it serves. 

What Qualifies a Micro Captive? 

There are three key boxes a micro captive company must check to be considered to qualify under 831(B).

First, the company must qualify as an insurance company and operate as an insurance company. To be considered this, a sufficient amount of risk must be utilized in business practice. This first qualification is essential for tax purposes. 

Next, as alluded to above, a company must be taxed as an American insurer under tax code section 953(d).

Last, the organization must also be able to conduct business with an annual gross premium of $2.2 million or less. 

What are the Benefits?

One of the most obvious benefits is a company’s ability to control costs as a member of the insurance business. The second is in saving money on insurance. 

Commercial insurance companies are a business. They upsell businesses and add costs and fees just like any other organization might. They have to pay for employees, advertising, marketing and so much more. 

A micro captive designation allows a company to save money on unnecessarily high premiums. It also comes with the power to negotiate rates and ultimately create a policy that best works for you, instead of trying to fit into a misshapen box of an existing policy. 

Take Back Control 

So, are you considering qualifying your business with micro captive insurance designation? Micro captive companies can also benefit from managing their own claims, protecting their assets, and taking control of the claims experience. 

Want more tips on how to rule your business life? Click over to our “business” section for more!