What legally makes a captive an insurance company and not just a savings account?
Licences and real risk transfer are what separate a captive from a bank account
Matt Queen starts from the sceptic's framing rather than arguing with it. He describes a captive as a bank account with legalities strapped around it, and says the money going in is premium rather than a transfer between accounts because the account carries insurance licences. That licensing is what lets the payment be treated as premium, and it is why the deduction exists at all.
The comparison people reach for is a savings account with an insurance label on it. Queen does not reject it. He says the healthiest way to start is to understand that you are putting premium into a bank account, which is what you already do when you pay a healthcare or car insurance premium. There is a bank account on the other end of those too.
What changes is ownership and licensing. In a captive the account is one you happen to own, and it carries licences affiliated with it. Queen's point is that the licences are doing the legal work: they are why money moving into that account counts as premium rather than as a transfer from one pocket to another.
Key takeaways
Queen accepts the bank account comparison rather than arguing with it, and says the licences attached to the account are what change its legal character.
Because the payment is premium rather than an intercompany transfer, Queen says it becomes a business deduction under the Internal Revenue Code section he cites.
He describes the money moving from a business checking account into conservative investments, which is how an insurer holds funds it may need to pay claims.
From there the money behaves the way an insurer's money behaves. Queen describes premium landing in what is effectively a business checking account and then moving into investments, typically low volatility stocks and bonds.
From the conversation
Matt Queen
Captive Insurance Attorney and MGA Executive, Author of Modern Captive Insurance
“And then that bank account carries a handful of licenses that are affiliated with it.”
Transcript
Read the full transcript 4 turns
HostWhat legally makes a captive and insurance company not just a savings account with a good name
Matt Queen? Honestly, I like the way you described it. Fundamentally, it's nothing more than a bank account with a whole bunch of legalities strapped around it, but that is probably the healthiest way of starting is just understanding that you're putting premium into a bank account. That is no different than the way you pay premium to your healthcare or your car insurance company. There is a bank account there as well. And what you do for a capital insurance
Matt Queencompany is you just put it into a bank account that you also happen to own. And then that bank account carries a handful of licenses that are affiliated with it. Consequently, the money you put into it are considered premium by comparison to just transferring money from one account to the other. And then that premium by internal revenue codes section 162 is a business deduction. Consequently, you get to deduct the premium that you pay to finance
Matt Queena risk. Consequently, you are literally just putting money into a checking, probably a business checking account. And then from there, you transfer into some sort of an investment, typically stocks, low volatility stocks and bonds
Citations
Sources
- 26 U.S. Code Section 162, Trade or business expenseshttps://www.law.cornell.edu/uscode/text/26/162
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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