R. Wesley Sierk, III CLU, ChFC, ARM, ACI

Risk Management Advisors, Inc.110 Pine Ave, Ste 310Long Beach, CA 90802

Transform Your Practice Using Captives

Agents always looking for ways to sell big ticket insurance policies

Captives can provide

• Large income tax deductions

• Gift and Estate tax free transfers

• Large life insurance premium sales

Agenda

• What is a captive insurance company?

• How is the property / casualty marketplace structured?

• What are the IRS rules and regulations?

• How can you use captive insurance companies to increase your life insurance premiums and save your clients money?

• Case Studies

The IRS has adversely impacted most of the tax advantaged uses

of life insurance

• Equity Split Dollar• Deferred Compensation• 412(i) Plans• 419A(f)(6)• VEBAs

A Captive insurance company could be the perfect solution for mid-market companies who want

to take large deductions

What is a Captive?

Insurance company wholly owned and controlled by its insureds

Insurance company that insures the risks of the parent company

Assessing the Captive Frontier

MAXIMUMRETENTIO

N

LEAST COMPLEX

ZERORETENTIO

NMOST COMPLEX

Retained

Risk

Guaranteed Cost Insurance Plans

•Loss Sensitive Insurance Plans

•Risk Purchasing Groups•

Self-Insured Retention Plans (SIRs)

•

Single Parent Captives•Cell Captives

•

Association Captives•Risk Retention Groups•

Program Business Captives

•

PrimaryMarket

Alternative Market

Complexity from Buyers’ Perspective

*Captive Insurance Company Reports Estimate

Growth of Captive Industry* 1970 – 2006

1970 1980 1990 2000 0

1000

2000

3000

4000 Market Cycle

Captive Growth

INSURED RISKS

UNINSURED RISKS

Many Insured & Uninsured business risks can be insured through a Captive Insurance Company

We work primarily with the

INSURED RISKS! Health Ins.

D&O

Workers

Comp

Gener

al Liab

ility E

& O

Exc

ess

Contract Claims

Punitive D

amages

Intentional Acts

Exc

lusi

ons

Earthquake

Mold

Construction DefectFin. Guarantee

Deducti

bles

Business Risk Profile

How do we structure them?• Begin with traditional insurance coverage

• Property & Casualty Experts

• Highly Credentialed

• Published nationally on the subject of Captives and Alternative Risk Transfer

• Mainly Domestic Captives

• Mostly Single Parent Captives

What Some Promoters’ Plans Do

• Insure only currently uninsured risks

• Improper use of risk distribution rules

• Cross insure between clients

• Charge excessive premiums for unnecessary insurance (i.e., terrorism, sexual harassment)

• Non-disclosure of tax aspects of plans

• Improper Promotional Material – One promoter’s material calls it “discriminatory,

deductible, deferred compensation program”

Two Main Taxation Types-• 831(b)

• First $1.2 M of premiums tax free• Corporate taxes on investment earnings• Use COLI to defer taxes on earnings

• Regular Insurance Companies• Captive recognizes premium as income• Deduction for reserves and IBNR• Corporate taxes on investment earnings• Use COLI to defer taxes on earnings

Types of Captives:

Rent-A-CaptiveProtected Cell CaptiveSingle Parent CaptiveIndustry CaptivesAssociation CaptivesRisk Retention Group CaptivesAgency Captives

Why aren’t they widely used?

• Nature of Property & Casualty

• Conflict of Interests

• Negative Perceptions

• Offshore Abuses• Only for Large Companies• Too Expensive

• Sophisticated Purchaser / Broker

Onshore vs. Offshore

• Nearly 50 domiciles have passed captive insurance legislation

• Taxation: 954(d) election

• Risk - Real vs. Perceived

IRS Rules and Regulations

• Long standing legislative approval

• IRS is clear on what works and what doesn’t work

• Rev. Rul. 2005-40 ‘Safe Harbors’

Case Studies

Commercial Property

Prospect: Property Owner/Developer

Industry: Real Estate

Income: $3,110,000 in profits

Needs: Strategies to protect assets and reduce tax

Planning: Multiple LLCs

Property Owner/Developer

2 Partners

Real Estate Organization

(16 LLCs)

Captive Insurance Company

1.1M Premium

P&C Insurance

100% Owners Captive Profits

Claims Reserves and Surplus

InvestmentsHigh Cash Value

Life Insurance

Reinsurance

Health Insurance Captive

Prospect: Profitable business ownerIndustry: Wholesale and retail flooring

distributionRevenue: $40,000,000 in company revenueNeeds: Reduce cost of 150+ life group

medical planPlanning: C-Corp, Blue Cross HMO & PPO Plan

Health Insurance Captive

Health Insurance Company

(Front)Parent Company

Captive Insurance Company

1.2M Premium

Claims Reserves and Surplus

InvestmentsHigh Cash Value Life Insurance

ReinsuranceCompany

Coverage above 30k per

Cedes 1.1M Premium

250k Premium

Company Executives

20% Owner

80% Owner

Health Insurance Captive – Employer Benefit

• Reduce (stabilize in some circumstances) current premium outlay for health coverage (currently 10% of GDP, projected to be 25% of GDP by 2015)

• Transform millions of dollars from health insurance premiums into insurance company reserves they own and control

• Ability to use detailed claims payment histories to negotiate better pricing with reinsurers

Health Insurance Captive – Owner’s Benefit

• Company executives are 20% owners of captive insurance company

• Executives use captive ownership as an addition to their retirement planning

• When Executives retire, sell captive shares back to the Company as long-term capital gains

• Potential estate / gift tax savings

Other Prospects

• Developers

• General Contractors

• Subcontractors

• Manufacturers

• Professional Services Firm

• Franchisees

• Restaurant / Hotel Chains

• Family Offices / Estate Planning

• Garment Industry

Captives Can Transform Your Practice

Open better cases with bigger prospects and larger premium opportunities(Recently traveled to Florida with an NFP producer, eight meetings in two days, each prospect had a net worth in excess of $100 Million. The producer used captives as a differentiator)

$20,000 Agent Referral Fee

Life Insurance Commission (no splits)

Coming Nov 2007- preorder available at takencaptive.com

Next Steps – How to Work With Us

1. Call us to discuss new cases – tell us the client’s “story”

2. Gather census data, client “wish list”, and current plan information

3. We will prepare a proposal and/or “narrative” and discuss with advisor and client

4. We will prepare final numbers based on client and/or advisor feedback

5. Plan implementation begins.

You may reach us at 877-RMA-CAPTive (877-762-2278)

or send an e-mail to info@riskmgmtadvisors.com