PAUL H. GRAHAM
← All GuidesHow does a captive insurance strategy work as a tax play for larger businesses?
A business creates its own licensed insurance company to insure risks it currently self-insures or under-insures, and the premiums paid into that captive are deductible while building reserves the business ultimately controls.
Many larger businesses carry risks that standard commercial insurance doesn't cover well, or covers at a cost that doesn't reflect the business's actual risk profile. A captive insurance company lets the business insure those specific risks on its own terms.
Premiums paid to the captive are generally deductible to the operating business, while the captive itself, if properly structured, can accumulate those reserves with favorable tax treatment, effectively building a reserve fund with a real tax benefit.
This strategy carries real regulatory complexity and generally only makes sense for businesses with substantial revenue and genuine, insurable risk. It requires ongoing actuarial and legal support to remain compliant, not a set-and-forget structure.
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