Deductible Reimbursement Policies: a Bread and Butter Captive Insurance Policy

On Friday, March 3, we're offering a free, 1-hour CPE course for U.S. based accountants and CFPs.  You can sign up at this link.

We own and operate the first Montana based series LLC named Aegis.  We run it in conjunction with Aceterrus Insurance Resources

Every business has a “must have” insurance policy.  For professionals (doctors, lawyers and accountants) it’s professional liability; for real estate developers its property; for manufacturers its product liability, product recall and potentially supply-chain interruption.  For the reader, simply think about the primary risk your business faces and how you cover that with some type of insurance policy.
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     Visually, most people buy coverage that looks like this:

​In the above graphic, each cell represents $250,000.  Most businesses buy a standard $1,000,000/$1,000,000 policy – their insurance will cover each “incident” up to $1,000,000 (the first $1,000,000 on the left side of the slash) while the insurance company will, at most, cover $1,000,000 for all claims filed during the year (the second million on the right side of the slash).  In the above graphic, an insurance company will indemnify the insured for each $250,000, starting at 1 cent.

     Let’s now suppose that you’re a really good risk – you’ve never filed a claim.  At the same time, you’ve never missed a payment.  That means that all you’re really doing is fattening the insurance company’s bottom line while also paying claims for people who are riskier.  Wouldn’t it make more sense for you to assume some of that risk? 
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     Thanks to a deductible reimbursement policy, you can.  Let’s change the above graphic into this:

Now you buy your standard policy from your third party insurer, but with a twist: you get a $500,000 deductible.  Next, you form a captive insurance company that sells your company a “deductible reimbursement policy,” which provides coverage for the first $500,000 – the red area above.  In the event you file a claim, your captive covers the first $500,000 of risk.  Instead of sending all your premium money to an insurer, you are some of that money to yourself. 

     This is very similar to the difference between renting a home and owning a home.  In the former, you make your landlord rich, in the latter, you help to make yourself rich.  As I often tell clients, when done properly, insurance is a very profitable business.

     Please contact us at 832.330.4101 if you'd like to learn more.