Captive insurance companies are usually formed and controlled by businesses to insure or reinsure their own risks. When a business that is otherwise well suited for a captive programme is closely held and privately owned, an opportunity exists to make use of the captive for estate planning purposes. By putting some or all of the ownership of the captive in the hands of future generations, directly or indirectly, through trusts or partnerships, the business owner can transfer wealth in an extremely tax-efficient manner.
When a business owner pays reasonable insurance premiums to a captive, the business owner can deduct that payment as a business expense. On the other side of the transaction is an insurance company, which by law is provided with certain special tax incentives. As such, premiums received may be completely non-taxable to the captive or in large part offset by a deduction for reserves.