Once Scrutinized, an Insurance Product Becomes a Crisis Lifeline

“To the extent they’re incurring out-of-pocket expenses, we’ll pay those more quickly,” Ms. Euteneuer said. “It will cause their net loss to decrease, so we’ll provide coverage for mitigation expenses. Those are some of our best success stories.”

There are other ways a captive could help a struggling business now.

Business owners normally keep the captive policy at arm’s length to preserve its legitimacy and to maintain its tax benefits (collected premiums grow tax deferred). But a captive could invest its assets in the business itself if the business owner needed the infusion to keep operating.

The captive policy could be used to buy stock in the business or make loans to the business, said Jay Adkisson, a lawyer who specializes in these vehicles. “That is ordinarily not a good practice because it might destroy any tax benefits of the captive, but in that scenario, the business probably isn’t generating much in taxable profits anyway.”

A business owner could also take a distribution from the captive policy. Depending on its size, a distribution may require approval from the insurance regulator, but it cannot risk the solvency of the captive. The owner could also borrow from the captive.

“A well-financed captive can act as a hidden pool of ‘rainy day money’ should the business need it,” Mr. Adkisson said. “A lot of these captives have been very well-financed over the years. Those companies won’t have their backs as close to the walls as companies that don’t have them.”

With all of these strategies, a wealthy business owner needs to be aware of tax consequences. In taking a distribution, the business owner would have to pay capital gains taxes on the money. “There is no way to avoid paying taxes when you get out of the captive,” Mr. Adkisson said.

If the money came in the form of a claim for business interruption, Mr. Slenn said, the business owner would need to seek advice on what was taxable and what was not.

Article source: https://www.nytimes.com/2020/03/20/your-money/coronavirus-insurance-small-business.html