Insight

Benefits of Captives: They Can Insure Against Pandemics

Benefits of Captives: They Can Insure Against Pandemics

Allen D. Hankins

Allen D. Hankins

August 17, 2020 11:25 AM

This article was originally published on the Boston Business Journal’s website. View the article here.

What do the overwhelming majority of Fortune 500 companies have in common? They are in the insurance business and have created wholly-owned insurance companies, referred to as “captives,” to insure risk. Many small and mid-size companies that have subsidiaries or affiliates, including real estate entities, also have the opportunity to take advantage of captives. A captive insurance company is a closely-held insurance company that does not write policies for the general public. A typical captive insurance company insures risks of the captive owner’s businesses that are otherwise unavailable in traditional insurance markets or that are extremely expensive to obtain.

The many pros to captives

If an insurance company with gross premium income of $2.2 million or less (known as a mini-captive) makes an election with the IRS, it avoids tax on its premium income; at the same time, the parent entity that paid the insurance premium to the captive gets a tax deduction for the expense. In addition, because the captive insurance company is a C corporation, it can issue more than one class of stock and can pay out “qualifying” dividends at preferential income tax rates.

Captives provide additional benefits. Captives create a pre-tax loss reserve to address future risks. While captives should not replace existing insurance programs, they may significantly reduce insurance costs while providing expanded coverage in a tax efficient manner.

In the last few months, many companies have unfortunately learned that their insurance companies are denying business interruption claims for losses resulting from the pandemic because there was no physical damage. A captive can insure against pandemics and other non-damage related business interruption events, such as loss of rental income and lost profits. Other typical coverages offered by a captive include owner/firm legal defense expenses, deductibles for third-party insurance, trade losses, customer bankruptcy, tenant loss, supply chain interruption, regulatory fines and cyber theft.

On an annual basis, the premiums paid to the captive in excess of its claims and operating expenses can be made available for investment or distribution to shareholders. An added benefit of captives is that there may also be opportunities for gift and estate tax savings to the shareholders of captives.

Candidates for captives

The use of a captive should be considered for entities that meet the following criteria.

  • Profitable business entities seeking substantial annual tax deductions.
  • Business owners with multiple entities or businesses that can create multiple operating subsidiaries or affiliates.
  • Businesses with $1,000,000 or more in annual profits.
  • Businesses with uninsured or underinsured risk.
  • Business owners interested in personal wealth accumulation and/or estate planning.
  • Determine if a captive insurance company is right for your business.

The formation and administration of a captive insurance company is a complex and involved process. It requires a team approach that includes experienced counsel, a captive insurance manager, a CPA and, in many instances, an actuary. The IRS has been concerned that some captives were and are abusing the captive election and never operated as a true insurance company that insured risks and paid claims. To address these concerns, companies need to make sure that a captive not only meets the necessary formation criteria but also operates in a similar manner to a traditional insurance company. If the rules are followed, captives will provide significant financial benefits and enhanced risk coverage.

Trending Articles

Introducing the 2026 Best Lawyers Awards in Australia, Japan, New Zealand and Singapore


by Jennifer Verta

This year’s awards reflect the strength of the Best Lawyers network and its role in elevating legal talent worldwide.

2026 Best Lawyers Awards in Australia, Japan, New Zealand and Singapore

Revealing the 2026 Best Lawyers Awards in Germany, France, Switzerland and Austria


by Jamilla Tabbara

These honors underscore the reach of the Best Lawyers network and its focus on top legal talent.

map of Germany, France, Switzerland and Austria

Effective Communication: A Conversation with Jefferson Fisher


by Jamilla Tabbara

The power of effective communication beyond the law.

 Image of Jefferson Fisher and Phillip Greer engaged in a conversation about effective communication

The 2025 Legal Outlook Survey Results Are In


by Jennifer Verta

Discover what Best Lawyers honorees see ahead for the legal industry.

Person standing at a crossroads with multiple intersecting paths and a signpost.

The Best Lawyers Network: Global Recognition with Long-term Value


by Jamilla Tabbara

Learn how Best Lawyers' peer-review process helps recognized lawyers attract more clients and referral opportunities.

Lawyers networking

Jefferson Fisher: The Secrets to Influential Legal Marketing


by Jennifer Verta

How lawyers can apply Jefferson Fisher’s communication and marketing strategies to build trust, attract clients and grow their practice.

Portrait of Jefferson Fisher a legal marketing expert

Is Your Law Firm’s Website Driving Clients Away?


by Jamilla Tabbara

Identify key website issues that may be affecting client engagement and retention.

Phone displaying 'This site cannot be reached' message

A Guide to Workers' Compensation Law for 2025 and Beyond


by Bryan Driscoll

A woman with a laptop screen reflected in her glasses

Best Lawyers Launches CMO Advisory Board


by Jamilla Tabbara

Strategic counsel from legal marketing’s most experienced voices.

Group photo of Best Lawyers CMO Advisory Board members

Common Law Firm Landing Page Problems to Address


by Jamilla Tabbara

Identify key issues on law firm landing pages to improve client engagement and conversion.

Laptop showing law firm landing page analytics

Changes in California Employment Law for 2025


by Laurie Villanueva

What employers need to know to ensure compliance in the coming year and beyond

A pair of hands holding a checklist featuring a generic profile picture and the state of California

New Employment Law Recognizes Extraordinary Stress Is Everyday Reality for NY Lawyers


by Bryan Driscoll

A stressed woman has her head resting on her hands above a laptop

Turn Visitors into Clients with Law Firm Website SEO That Converts


by Jamilla Tabbara

Learn how to create high-converting law firm landing pages that drive client engagement and lead generation.

Laptop screen displaying website tools to improve client conversion rates

SEO for Law Firms: Overcoming Common Challenges


by Jamilla Tabbara

Tackle common SEO challenges and take the next step with our guide, How to Make Your Law Firm Easier to Find Online.

Graphic image of a phone displaying SEO rankings, with positions 1, 2 and 3 on the screen

Best Lawyers Introduces Smithy AI


by Jamilla Tabbara

Transforming legal content creation for attorneys and firms.

Start using Smithy AI, a content tool by Best Lawyers

6 Steps to Finding the Right Keywords for Your Legal Content


by Jamilla Tabbara

Follow a practical guide to keyword research and boost your law firm’s SEO to reach more potential clients.

 letters symbolizing keywords for legal content