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Captive Insurance (Section 831b)

A wholly owned insurance subsidiary that insures the parent company's business risks, providing tax-deductible premium payments and potential tax-free investment growth within the captive.

Structure Source: Billionaire Wealth Strategies Verified: 2026-04-07

Definition

A captive insurance company is a subsidiary formed to insure the risks of its parent company. The parent pays insurance premiums to the captive, which are tax-deductible business expenses. Under Section 831(b), small captives with annual premiums under $2.65 million (2025) can elect to be taxed only on investment income, effectively exempting underwriting income from tax.

How It Works

The business forms an insurance subsidiary (typically domiciled in a captive-friendly state like Vermont, Delaware, or a U.S. territory). The parent company pays premiums to the captive for coverage of legitimate business risks that are difficult or expensive to insure in the commercial market (supply chain disruption, key person risk, regulatory risk, cyber threats).

The premiums are deductible by the parent company, reducing taxable income. The captive invests the premiums and reserves. Under the 831(b) election, the captive pays tax only on investment income, not on the premiums received. Over time, the captive accumulates reserves that can be distributed to shareholders (typically the business owner's estate planning trust) through various mechanisms.

When Entrepreneurs Use This

Businesses with insurable but hard-to-cover risks: Risks that commercial insurers price excessively or refuse to cover
High-income business owners: The premium deduction offsets ordinary income
Estate planning integration: Captive ownership can be structured within trusts for wealth transfer

Dew Wealth Perspective

Captive insurance has been subject to significant IRS scrutiny, particularly for arrangements that lack genuine risk transfer or economic substance. Dew Wealth advises that any captive must insure real business risks at arm's-length premium rates, be managed by a licensed captive management company, and maintain adequate reserves. The Linchpin Partner coordinates between the captive manager, tax advisor, and business attorney.

Frequently Asked Questions

Is this too aggressive for the IRS?

Legitimate captives with genuine risk transfer are well-established and legal. Abusive micro-captives that exist solely for tax avoidance have been targeted by the IRS. The key is real insurance for real risks at fair premiums.

What risks can the captive insure?

Any insurable business risk: supply chain disruption, cybersecurity, employment practices, regulatory changes, key person loss, and other risks that are either uninsurable or expensive in the commercial market.

Disclosure

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