Stop Paying Insurance Premiums! Start Your Own 'Captive Insurance Company' to Save Millions

🔥 Why Burn Money on Insurance? Keep It.

Every year, your business writes a huge check to big insurance companies (like Hartford or Chubb) for liability coverage, workers' comp, and property insurance.

If you don't have a claim, that money is gone forever. It's a sunk cost.

But what if you wrote that check to yourself? What if you owned the insurance company? This is not a fantasy. It is called a "Captive Insurance Company." Under IRS Section 831(b), you can turn millions of dollars of "expenses" into tax-free family wealth.

For Fortune 500 companies, owning their own insurance company is standard practice. But most small business owners don't realize they can do the exact same thing on a smaller scale. This is known as a "Micro-Captive."

It is one of the most powerful wealth accumulation tools in the U.S. Tax Code, but it is also one of the most scrutinized. Today, we will break down how to do it right without triggering an IRS audit war. 

Stop Paying Insurance Premiums!

What is a Captive Insurance Company?

A "Captive" is a real, licensed insurance company that you form primarily to insure the risks of your own operating business.

The Basic Flow

1. 🏢 Step 1: Your Business (Operating Company)
   Pays $1,000,000 in insurance premiums to the Captive for coverage (e.g., Cyber Risk, Business Interruption, Supply Chain Failure).
   👉 Benefit: The business deducts this $1M as a legitimate business expense, lowering its taxable income.
2. 🏦 Step 2: Your Captive (Insurance Company)
   Receives the $1,000,000 premium. Under Section 831(b), if premiums are under $3.0 million (2026 inflation-adjusted limit), the Captive pays $0 federal income tax on that premium income.
   👉 Benefit: The money stays in your control, grows tax-deferred, and turns into a massive asset bucket.

The Magic of Section 831(b)

Normally, if a company receives income, it pays tax. But Congress created Section 831(b) to help small insurance companies survive.

If your Captive collects less than $3.0 million in annual premiums (2026 estimate), it is taxed ONLY on its investment income, not on the premiums collected.

Scenario	Without Captive	With Captive (831b)
Business Profit	$5,000,000	$5,000,000
Insurance Expense	-$0 (Retained Risk)	-$2,000,000 (Paid to Captive)
Taxable Income	$5,000,000	$3,000,000
Tax Paid (Assume 40%)	$2,000,000	$1,200,000
Family Wealth Created	$0	$2,000,000 (In Captive)

*Result: You saved $800,000 in taxes and moved $2,000,000 into a company you own.

⚠️ State Tax Warning (WA & CA): Be aware of "Self-Procurement Taxes." Even if your Captive is domiciled in a tax-friendly state like Delaware or Vermont, states like Washington and California aggressively tax premiums paid by businesses located in their jurisdiction. Failure to pay these state premium taxes can lead to severe penalties.

What Risks Can I Insure?

You can't just make things up. You must insure real, fortuitous risks that your standard commercial insurance doesn't cover (or covers poorly).

1. The "Uninsurable" Risks

Commercial carriers often exclude these, making them perfect for your Captive:

• Audit Defense: Cost of fighting an IRS or OSHA audit.
• Cyber Attack Deductibles: Covering the huge deductible on your main cyber policy.
• Supply Chain Interruption: Loss of income if a key supplier fails.
• Loss of Key Customer: Revenue drop if your biggest client leaves.

The "Investment" Side Benefit

So, the Captive now has $2 million sitting in its bank account. What happens to it?

It acts like a Family Bank. The Captive can invest that money into stocks, bonds, or even real estate (within strict regulatory guidelines).

If you have a claim (e.g., a cyber attack), the Captive pays your business. If you don't have a claim (which is the goal), the money keeps growing inside the Captive. Years later, you can liquidate the company and take the money out as Qualified Dividends (20% tax) instead of Ordinary Income (37%+ tax).

IRS WARNING (The "Dirty Dozen" List)

This strategy sounds too good to be true, which is why the IRS hates it. Abusive Micro-Captives have been on the IRS "Dirty Dozen" list of tax scams for years.

⚠️ How to Avoid Jail (and Penalties)

If you set up a "fake" insurance company just to save taxes, you will be crushed. To stay legal, you MUST.

1. Risk Distribution: The Captive cannot only insure you. It must participate in a "Risk Pool" with other companies to spread the risk. (This is the #1 reason captives fail audits).
2. Act Like an Insurer: You must issue real policies, pay actuaries to calculate premiums, and pay claims promptly.
3. Reasonable Premiums: You cannot charge yourself $500,000 for "pencil breaking insurance." Premiums must be commercially reasonable.

🛡️ Chief Editor’s Verdict

Is a Captive right for you?

1. Check Your Income: This strategy is generally only viable if your business has $1 million+ in taxable profit and free cash flow.
2. Check Your Costs: Setting up a Captive costs $50k-$100k, and annual maintenance is $30k-$50k. If you aren't saving at least $200k in taxes, it's not worth it.
3. Find a Specialist: Do not use your regular CPA. You need a dedicated "Captive Manager" (like Artex, Oxford, or Capstone).

A Captive is the ultimate "Rich Dad" move: Taking a permanent expense and turning it into a permanent asset.

[Legal Disclaimer]
This article is for informational purposes only and does not constitute tax or legal advice. Captive Insurance Companies (Section 831(b)) are designated as "Transactions of Interest" under IRS Notice 2016-66 and require strict reporting on Form 8886. Failure to report can result in substantial penalties. State laws regarding self-procurement taxes (specifically in Washington and California) vary and are aggressively enforced. Always consult with a qualified tax attorney and captive manager before implementation.