R. Wesley Sierk, III

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Transform Your Practice Using Captives

• R. Wesley Sierk, III
• CLU, ChFC, ARM, ACI
• Risk Management Advisors, Inc.
• 110 Pine Ave, Ste 310
• Long Beach, CA 90802

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Agents always looking for ways to sell big ticket
insurance policies

• Captives can provide
• Large income tax deductions
• Gift and Estate tax free transfers
• Large life insurance premium sales

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Agenda

• What is a captive insurance company?
• How is the property / casualty marketplace
  structured?
• What are the IRS rules and regulations?
• How can you use captive insurance companies to
  increase your life insurance premiums and save
  your clients money?
• Case Studies

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The IRS has adversely impacted most of the tax
advantaged uses of life insurance

• Equity Split Dollar
• Deferred Compensation
• 412(i) Plans
• 419A(f)(6)
• VEBAs

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A Captive insurance company could be the perfect
solution for mid-market companies who want to
take large deductions
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What is a Captive?

• Insurance company wholly owned and controlled by
  its insureds
• Insurance company that insures the risks of the
  parent company

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Assessing the Captive Frontier
MAXIMUM RETENTION
R e t a i n e d R i s k
Alternative Market
Primary Market
ZERO RETENTION
Complexity from Buyers Perspective
LEAST COMPLEX
MOST COMPLEX
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Growth of Captive Industry 1970 2006
Captive Growth
Market Cycle
4000
3000
2000
1000
0
1970 1980
1990 2000
Captive Insurance Company Reports Estimate
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Business Risk Profile
UNINSURED RISKS
Exclusions
Many Insured Uninsured business risks can be
insured through a Captive Insurance Company We
work primarily with the INSURED RISKS!
Punitive Damages
Intentional Acts
Deductibles
Contract Claims
DO
Mold
Earthquake
Construction Defect
Workers Comp
Fin. Guarantee
General Liability
Health Ins.
Excess
E O
INSURED RISKS
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How do we structure them?

• Begin with traditional insurance coverage
• Property Casualty Experts
• Highly Credentialed
• Published nationally on the subject of
  Captives and Alternative Risk Transfer
• Mainly Domestic Captives
• Mostly Single Parent Captives

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What Some Promoters Plans Do

• Insure only currently uninsured risks
• Improper use of risk distribution rules
• Cross insure between clients
• Charge excessive premiums for unnecessary
  insurance (i.e., terrorism, sexual harassment)
• Non-disclosure of tax aspects of plans
• Improper Promotional Material
• One promoters material calls it
  discriminatory, deductible, deferred
  compensation program

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Two Main Taxation Types-

• 831(b)
• First 1.2 M of premiums tax free
• Corporate taxes on investment earnings
• Use COLI to defer taxes on earnings
• Regular Insurance Companies
• Captive recognizes premium as income
• Deduction for reserves and IBNR
• Corporate taxes on investment earnings
• Use COLI to defer taxes on earnings

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Types of Captives

• Rent-A-Captive
• Protected Cell Captive
• Single Parent Captive
• Industry Captives
• Association Captives
• Risk Retention Group Captives
• Agency Captives

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Why arent they widely used?

• Nature of Property Casualty
• Conflict of Interests
• Negative Perceptions
• Offshore Abuses
• Only for Large Companies
• Too Expensive
• Sophisticated Purchaser / Broker

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Onshore vs. Offshore

• Nearly 50 domiciles have passed captive
  insurance legislation
• Taxation 954(d) election
• Risk - Real vs. Perceived

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IRS Rules and Regulations

• Long standing legislative approval
• IRS is clear on what works and
• what doesnt work
• Rev. Rul. 2005-40 Safe Harbors

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Case Studies
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Commercial Property

• Prospect Property Owner/Developer
• Industry Real Estate
• Income 3,110,000 in profits
• Needs Strategies to protect assets
• and reduce tax
• Planning Multiple LLCs

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Property Owner/Developer
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Health Insurance Captive

• Prospect Profitable business owner
• Industry Wholesale and retail flooring
• distribution
• Revenue 40,000,000 in company revenue
• Needs Reduce cost of 150 life group medical
  plan
• Planning C-Corp, Blue Cross HMO PPO Plan

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Health Insurance Captive
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Health Insurance Captive Employer Benefit

• Reduce (stabilize in some circumstances) current
  premium outlay for health coverage (currently 10
  of GDP, projected to be 25 of GDP by 2015)
• Transform millions of dollars from health
  insurance premiums into insurance company
  reserves they own and control
• Ability to use detailed claims payment histories
  to negotiate better pricing with reinsurers

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Health Insurance Captive Owners Benefit

• Company executives are 20 owners of captive
  insurance company
• Executives use captive ownership as an addition
  to their retirement planning
• When Executives retire, sell captive shares back
  to the Company as long-term capital gains
• Potential estate / gift tax savings

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Other Prospects

• Developers
• General Contractors
• Subcontractors
• Manufacturers
• Professional Services Firm
• Franchisees
• Restaurant / Hotel Chains
• Family Offices / Estate Planning
• Garment Industry

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Captives Can Transform Your Practice

• Open better cases with bigger prospects and
  larger premium opportunities
• (Recently traveled to Florida with an NFP
  producer, eight meetings in two days, each
  prospect had a net worth in excess of 100
  Million. The producer used captives as a
  differentiator)
• 20,000 Agent Referral Fee
• Life Insurance Commission (no splits)

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Coming Nov 2007- preorder available at
takencaptive.com
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Next Steps How to Work With Us

• Call us to discuss new cases tell us the
  clients story
• 2. Gather census data, client wish list, and
  current plan information
• 3. We will prepare a proposal and/or narrative
  and
• discuss with advisor and client
• 4. We will prepare final numbers based on client
  and/or advisor feedback
• 5. Plan implementation begins.
• You may reach us at 877-RMA-CAPTive
• (877-762-2278)
• or send an e-mail to info_at_riskmgmtadvisors.com