Health Insurance Help to Lower Your Premium

Illness for non-work related injuries can be financially devastating. Insurance keeps you protected against disastrous health care expenses and lost wages. There are enormous health insurance plans available day-to-day, the insurance cost and its benefits vary from one plans to another. Before enrolling for a policy, an individual should consult with the insurance agencies, read the policy to get the complete information about the benefits and costs and also the way the plan works.

Today, there are many more kinds of health insurance to choose from than were available just a few years ago. Traditional differences between and among plans do not longer any more. Also, there is been an increased emphasis on the role of consumers in managing their own health care and health care finances. There is a focus on providing information on the cost of care and health care quality-at the level of the physician, physician group, and hospital-to help consumers and employers choose among the many options available to them. The things have changed a lot, when most people in the United States had health insurance has indemnity insurance (also called as fee-for-service or traditional insurance). This type of insurance coverage assumed that the medical provider i.e. doctor or physicians will be paid a fee for each service provided to the patient.

When we talk about health insurance, we usually mean the kind of insurance that pays medical bills, hospital bills, and typically, prescription drug costs. Nowadays, the insurance also covers Medicare and Mediaid that provides health insurance coverage for certain people, senior citizens, people with disabilities and also an individual and families with low income. Today, the online information helps an individual to compare two best insurance policies and choose best among it. The insurance help an individual for financial planning and accordingly choose the best suitable for the family. The policy helps to avoid the burden of expensive medical bills and ensure the penny paid in health plan is paid for your care. It protects you and your family financially in the event of an unexpected serious illness or injury that could be very expensive.

In spite of available health insurance help online, unfortunately many Americans are still uninsured or underinsured. Some may be eligible for private or government but may have difficulty in finding the maze of complex rules and insurance jargons. Many more may not even have chosen the plans due to non-affordability coverage or may not be eligible for any. To help you choose right plan, we give you an overview of programs and strategies for seeking free or reduced-cost health care and managing medical debts.

Why does an individual require health insurance?

As the science and medical care advances, the ways of treatment are also increasing simultaneously. The main purpose of health insurance is to help in paying for care. It protects you and your family members in an unexpected serious illness and injury that may be high in cost. Additionally, you are more likely to get regular and routine checkups, if you have an insurance policy. Every individual requires insurance policy because you cannot predict your illness, injury and your high paying medical bills. One must seriously consider the need for health insurance for own and family. We also know that there is interlinking between having health insurance and getting protective health care. The research states that people having health insurance are more likely to have a regular doctor and get care when it is needed.

How should one get health insurance?

Most of the people get health insurance through their employers or company which they belong to. This is formerly known as group insurance. Some individuals don’t have access to group insurance. In this case, one may choose to purchase their own individual health insurance directly from public or privately owned insurance company. Most of the Americans in North America get health insurance through government programs that operate at National, State & Local Levels. Insurance- whether provided by your employer or purchased by you – can be both expensive and complex. To understand better option, you must take health insurance help from the experts and advisors.

Group Insurance:
Group Insurance is basically offered by the employers or else by an organization of which you are a member of union, professional association wherein you may get group coverage. The employee has to choose between several plans been offered by an employer’s including both indemnity insurance and managed care. Some employer may only offer one single plan. Some group plans may also include dental care with the health and medical benefits. Hence, it is a very important decision to be taken by and employee before choosing any insurance benefits offered by employer or an organization. It is also essential to compare plans to find the one that offers the benefits as per your need. Once you choose an insurance plan, you usually cannot switch over to another plan until next open season, usually set once a year.

In group health insurance, employer usually pays portion or all of the premiums. This means your costs for health insurance premiums will be lower than they would be if you paid the entire premium alone.

If you are a member of group insurance offered by an organization, you are benefited from being a member of a large group. You will have to pay lesser premium than an individual would be paying. However, the organization often does not pay a share of premium, meaning you are responsible to pay complete premium by yourself.

Individual Insurance:
In an individual Insurance, you get the coverage directly from the Insurance Company. You don’t have any access to the group insurance offered by an employer or an organization. When you buy you own insurance, you have to pay entire premium rather than sharing with an employer according to Group Insurance. In individual insurance, you do not share any cost of premium with your employer. You should analyze and choose an individual insurance plan that fits your needs at a price that you are willing to pay; you should also consult a tax advisor to find out whether you are eligible for any tax deduction as per the insurance plan.

Insurance variably differs from one company to another within an insurance industry, from one plan to another and one product to another. Hence, choosing right company, right product, right plan are the important criteria before choosing any plans.

Which type of health insurance is right for you?

Whether you choose group insurance or an individual insurance plan, you must carefully compare coverage and costs. You should compare the following important aspects like coverage and benefits, premiums, exclusions and limitations, access to hospitals, doctors, and other providers etc…

One must consider what kinds of services are covered by the plan? How are benefits being availed of health insurance plan; do you have to submit a claim? When do you need pre-approval to ensure coverage for care? What steps do you need to get the care of you and your family members need? You must ensure how does your insurance plan works. Don’t wait until you need emergency care to ask questions.

I am an author having an experience of 28 years in Insurance Industry having done the in-depth study of Insurance. Considering some knowledge, I hereby have shared some information and views about insurance, also some facts, figures and recommendation which enables an individual to choose right insurance policy from right person.

Article Source: http://EzineArticles.com/4108604

40+ Home Insurance Savings Tips

Your dwelling is often your most precious asset that you need to protect. We created a list of all savings opportunities associated with Home insurance. This list is the most complete perspective on home insurance savings tips. Numerous insurance brokers contributed to this list. So, let’s start!

1. Change your content coverage: Renting a Condo? You can often lower your content coverage. No need to insure your belongings to up to $250,000 if you only have a laptop and some IKEA furniture!

2. Renovations: Renovating your house can result in lower home insurance premiums, as home insurance premiums for older, poorly maintained dwellings are usually higher. Additionally, renovating only parts of your dwelling (e.g. the roof) can lead to insurance savings.

3. Pool: Adding a swimming pool to your house will likely lead to an increase in your insurance rates since your liability ( e.g. the risk of someone drowning) and the value of your house have increased.

4. Pipes: Insurers prefer copper or plastic plumbing – maybe it is a good idea to upgrade your galvanized / lead pipes during your next renovation cycle.

5. Shop around: Search, Compare, and switch insurance companies. There are many insurance providers and their price offerings for the same policies can be very different, therefore use multiple online tools and talk to several brokers since each will cover a limited number of insurance companies.

6. Wiring: Some wiring types are more expensive or cheaper than others to insure. Make sure you have approved wiring types, and by all means avoid aluminum wirings which can be really expensive to insure. Not all insurers will cover houses with aluminum wirings, and those that would, will require a full electrical inspection of the house.

7. Home Insurance deductibles: Like auto insurance, you can also choose higher home insurance deductibles to reduce your insurance premiums.

8. Bundle: Do you need Home and Auto Insurance? Most companies will offer you a discount if you bundle them together.

9. New Home: Check if insurer has a new home discount, some insurers will have them.

10. Claims-free discount: Some companies recognize the fact that you have not submitted any claims and reward it with a claim-free discount.

11. Mortgage-free home: When you complete paying down your house in full, some insurers will reward you with lower premiums.

12. Professional Membership: Are you a member of a professional organization (e.g. Certified Management Accountants of Canada or The Air Canada Pilots Association)? Then some insurance companies offer you a discount.

13. Seniors: Many companies offer special pricing to seniors.

14. Annual vs. monthly payments: In comparison to monthly payments, annual payments save insurers administrative costs (e.g. sending bills) and therefore they reward you lower premiums.

15. Annual review: Review your policies and coverage every year, since new discounts could apply to your new life situation if it has changed.

16. Alumni: Graduates from certain Canadian universities ( e.g University of Toronto, McGill University) might be eligible for a discount at certain Insurance providers.

17. Employee / Union members: Some companies offer discounts to union members ( e.g. IBM Canada or Research in Motion)

18. Mortgage insurance: Getting mortgage insurance when you have enough coverage in Life insurance is not always necessary: mortgage insurance is another name for a Life/Critical Illness / Disability insurance associated with your home only but you pay extra for a convenience of getting insurance directly when lending the money. For example a Term Life policy large enough to pay off your home is usually cheaper.

19. Drop earthquake protection: In many regions, earthquakes are not likely – you could decide not to take earthquake coverage which could lower your premiums. For example, in BC earthquake coverage can account for as much as one-third of a policy’s premium.

20. Wood stove: Choosing to use a wood stove means higher premiums – Insurance companies often decide to inspect the houses with such installations before insuring them. A decision to get rid of it means a lower risk and thus lower insurance premiums.

21. Heating: Insurers like forced-air gas furnaces or electric heat installations. If you have an oil-heated home, you might be paying more than your peers who have alternative heating sources.

22. Bicycle: You are buying a new bicycle and thinking about getting extra protection in case it is stolen when you leave it on the street e.g. when doing your groceries? Your Home insurance might be covering it already.

23. Stop smoking: Some insurers increase their premiums for the homes with smokers as there is an increased risk of fire.

24. Clean claim history: Keep a clean claim record without placing small claims, sometimes it makes sense to simply repair a small damage rather than claim it: you should consider both aspects: your deductibles and potential raise in premiums.

25. Rebuilding vs. market costs: Consider your rebuilding costs when choosing an insurance coverage, not the market price of your house (market price can be significantly higher than real rebuilding costs).

26. Welcome discount: Some insurers offer a so called welcome discount.

27. Avoid living in dangerous locations: Nature effects some locations more than others: avoid flood-, or earthquake-endangered areas when choosing a house.

28. Neighbourhood: Moving to a more secure neighbourhood with lower criminal rate will often considered in your insurance premiums.

29. Centrally-connected alarm: Installing an alarm connected to a central monitoring system will be recognized by some insurers in premiums.

30. Monitoring: Having your residence / apartment / condo monitored 24 hour can mean an insurance discount. e.g. via a security guard.

31. Hydrants and fire-station: Proximity to a water hydrant and/or fire-station can decrease your premiums as well.

32. Loyalty: Staying with one insurer longer can sometimes result in a long-term policy holder discount.

33. Water damages: Avoid buying a house which may have water damage or has a history of water damage; a check with the insurance company can help to find it out before you buy the house.

34. Decrease liability risk: Use meaningful ways to reduce your liability risk (e.g. fencing off a pool) and it can result in your liability insurance premiums going down.

35. Direct insurers: Have you always dealt with insurance brokers / agents? Getting a policy from a direct insurer (i.e. insurers working via call-center or online) often can be cheaper (but not always) since they do not pay an agent/broker commission for each policy sold.

36. Plumbing insulation: Insulating your pipes will prevent them from freezing in winter and reduce or even avoid insurance claims.

37. Dependent students: Dependent students living in their own apartment can be covered by their parents’ home insurance policy at no additional charge.

38. Retirees: Those who are retired can often get an additional discount – since they spend more time at home than somebody who works during the day and thus can prevent accidents like a fire much easier.

39. Leverage inflation: Many insurers increase your dwelling limit every year by considering the inflation of the house rebuilding costs. Make sure this adjustment is in line with reality and that you are not overpaying.

40. Credit score: Most companies use your credit score when calculating home insurance premiums. Having a good credit score can help you to get lower insurance rates.

41. Stability of residence: Some insurers may offer a stability of residence discount if you have lived at the same dwelling for a certain number of years.

Article Source: http://EzineArticles.com/7422262

Over 40 Ways to Decrease Your Auto Insurance Costs

There are multiple articles titled “7 ways to save on car insurance” or “5 Tips to lower your auto insurance costs” etc, but would it not be great to have all those saving tricks and discounts at one place? Below you will find such a list for Auto insurance. This list is a comprehensive overview of all opportunities to save on car insurance in Canada, and was compiled based on the results of numerous discussions with insurance brokers and through analyses of different insurance offerings.

1. Shop around: Search, Compare, and switch insurance companies. There are many insurance providers and their price offerings for the same policies can be very different, therefore use multiple online tools and talk to several brokers since each will cover a limited number of insurance companies.

2Bundle: Do you need Home and Auto Insurance? Most companies will offer you a discount if you bundle them together.

3Professional Membership: Are you a member of a professional organization (e.g. Certified Management Accountants of Canada or The Air Canada Pilots Association)? Then some insurance companies offer you a discount.

4. Students: Being a student alone can result in a student discount.

5. Alumni: Graduates from certain Canadian universities ( e.g University of Toronto, McGill University) might be eligible for a discount at certain Insurance providers.

6. Employee / Union members: Some companies offer discounts to union members.

7. Seniors: Many companies offer special pricing to seniors.

8. Direct insurers: Have you always dealt with insurance brokers / agents? Getting a policy from a direct insurer (i.e. insurers working via call-center or online) often can be cheaper (but not always) since they do not pay an agent/broker commission for each policy sold.

9. Annual vs. monthly payments: In comparison to monthly payments, annual payments save insurers administrative costs (e.g. sending bills) and therefore they reward you lower premiums.

10. Loyalty: Staying with one insurer longer can sometimes result in a long-term policy holder discount.

11. Annual review: Review your policies and coverage every year, since new discounts could apply to your new life situation if it has changed.

12. Welcome discount: Some insurers offer a so called welcome discount.

13. Benchmark your costs: Knowing how much other consumers similar to you pay for their insurance can help you identify the most cost-friendly insurance providers.

14. Car Insurance Deductibles: Increase your car insurance deductibles if you believe that you are capable of incurring higher payments for damages in case of an accident. This is especially suited for more experienced car drivers.

15. Being a second driver: Driving a car only occasionally? Become a second drive instead of being a principal driver

16. Minimal coverage: Driving an old car without large value? Get a minimal coverage required by law (mainly liability) w/o collision damage (you are still protected if you damage somebody’s car but damages on your car will not be covered)

17. Minimal Coverage: Driving an old, inexpensive car? Then only get a minimal coverage plan which is required by the law (mainly liability) without collision damage coverage (does not cover damage costs for your vehicle)

18. Leverage your Credit Card: Check if your credit card insurance includes rental car protection. Paying with a card that has insurance for rental car protection can you save you around $20 per day in Collision Damage Waiver fees.

19. Leverage rental car coverage: If you frequently rent cars and have an auto insurance policy, you should check if your own auto insurance policy actually covers the rental car. If it is the case, you can save on all Collision Damage Waiver costs for rental vehicles.

20. Rental car rider: If your existing auto insurance policy does not cover your rental car, you can often add it as a rider (policy extension) for $20-30 dollars a year. Compared to $20/day you would pay when renting a car, it’s not a bad deal!

21. Location, location, location: Car insurance costs are different from one province to another (e.g. moving from Ontario to Quebec will surely reduce your insurance costs by half). If you move within a province, you should check for any changes in car insurance costs, and ideally you should move to where costs are lower (e.g. Burlington, Ontario has one of the highest car insurance rates in Ontario)

22. CAA member: CAA Members: Are you a member of the CAA? Some insurance providers will reward you with lower insurance premiums, including, of course, the CAA.

23. Dashboard camera: Get a dashboard camera for your vehicle. Even though installing a dashboard camera does not result in direct savings (insurance companies do not offer any insurance discount related to dashboard cameras) but it can prove you not-at-fault when it is the case in an accident. It results in you avoiding unfair premium raises.

24. Driving Course: Successfully completing a driving course is sometimes recognized by some insurance providers and could help you reduce your premiums.

25. Improving your driving record: Do you have a bad driving record? Every three years previously incurred tickets are removed from your insurance history and your insurance premiums can go down.

26. At-Fault Accidents: Have you been in a couple of accidents in the past where you were at fault? With a little patience (six years with no accidents), your risk profile will improve allowing you to once again enjoy reasonable insurance premium rates.

27. Age: Senior drivers enjoy lower auto insurance premiums. Thus in several years your premiums can go down.

28. Car Make and Model: Wisely choose your car, as some car models are more susceptible to theft or even have a history of more risky drivers (e.g. Toyota Camry, Acura MDX, Toyota RAV4, and Honda Civic are usually quite expensive to insure)

29. Good Student: Yes, having good grades can have many positive impacts, and even on your auto insurance rates! E.g. one insurance company rewards students who are younger than 25 and have good grades (grade average of B or higher) with a discount up to 25%.

30. Multiple-cars-bundle: Bundle several cars on one policy and your rate can go down

31. Anti-theft system: Installing a certified anti-theft system in your car results in a lower risk of theft and thus can lead to insurance discounts.

32. Winter Tires: Having winter tires is important for driving safety during the winter, but can also help reduce your insurance premiums.

33. Repair costs: Choose a car that would cost less to repair in case of damage. The repair costs for certain cars (e.g. Mini Cooper or BMW) are higher than other (e.g. Ford Focus) and insurance providers are aware of that.

34. Claim History: Keeping a clean claims history can sometimes be more financially feasible than submitting claims for small damage repairs which could result in increased premiums. Contacting an insurance provider/broker could help you find out what makes sense.

35. Being married: In most provinces your marital status affects your insurance premiums (except in Nova Scotia)

36. Short distance to work: Finding a house close to your place of work reduces the distance that you need drive daily to work and thus results in lower insurance premiums.

38. Drop glass coverage: For cars with inexpensive windshields, it can be more economical to drop the glass coverage since in combination with the deductibles to be paid in case of an accident you’d pay more. It is up to you to calculate.

39. Retiree Discounts: Some insurance companies will offer different retirement discounts for drivers.

40. Disabilities: Some companies offer discounts for people with disabilities.

41. Hybrid vehicles: Many companies award driving a hybrid vehicle with lower insurance premiums.

42. Private Garage: Parking your car in a safe location (e.g. private or secure garage) normally results in lower insurance premiums with auto insurance providers.

Article Source: http://EzineArticles.com/7422169

Avoid These Six Common Life Insurance Mistakes

Life insurance is one of the most important components of any individual’s financial plan. However there is lot of misunderstanding about life insurance, mainly due to the way life insurance products have been sold over the years in India. We have discussed some common mistakes insurance buyers should avoid when buying insurance policies.

1. Underestimating insurance requirement: Many life insurance buyers choose their insurance covers or sum assured, based on the plans their agents want to sell and how much premium they can afford. This a wrong approach. Your insurance requirement is a function of your financial situation, and has nothing do with what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers say that a cover of 10 times your annual income is adequate because it gives your family 10 years worth of income, when you are gone. But this is not always correct. Suppose, you have 20 year mortgage or home loan. How will your family pay the EMIs after 10 years, when most of the loan is still outstanding? Suppose you have very young children. Your family will run out of income, when your children need it the most, e.g. for their higher education. Insurance buyers need to consider several factors in deciding how much insurance cover is adequate for them.

· Repayment of the entire outstanding debt (e.g. home loan, car loan etc.) of the policy holder

· After debt repayment, the cover or sum assured should have surplus funds to generate enough monthly income to cover all the living expenses of the dependents of the policy holder, factoring in inflation

· After debt repayment and generating monthly income, the sum assured should also be adequate to meet future obligations of the policy holder, like children’s education, marriage etc.

2. Choosing the cheapest policy: Many insurance buyers like to buy policies that are cheaper. This is another serious mistake. A cheap policy is no good, if the insurance company for some reason or another cannot fulfil the claim in the event of an untimely death. Even if the insurer fulfils the claim, if it takes a very long time to fulfil the claim it is certainly not a desirable situation for family of the insured to be in. You should look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to select an insurer, that will honour its obligation in fulfilling your claim in a timely manner, should such an unfortunate situation arise. Data on these metrics for all the insurance companies in India is available in the IRDA annual report (on the IRDA website). You should also check claim settlement reviews online and only then choose a company that has a good track record of settling claims.

3. Treating life insurance as an investment and buying the wrong plan: The common misconception about life insurance is that, it is also as a good investment or retirement planning solution. This misconception is largely due to some insurance agents who like to sell expensive policies to earn high commissions. If you compare returns from life insurance to other investment options, it simply does not make sense as an investment. If you are a young investor with a long time horizon, equity is the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is at least three or four times the maturity amount of life insurance plan with a 20 year term, with the same investment. Life insurance should always been seen as protection for your family, in the event of an untimely death. Investment should be a completely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you should separate the insurance component and investment component and pay careful attention to what portion of your premium actually gets allocated to investments. In the early years of a ULIP policy, only a small amount goes to buying units.

A good financial planner will always advise you to buy term insurance plan. A term plan is the purest form of insurance and is a straightforward protection policy. The premium of term insurance plans is much less than other types of insurance plans, and it leaves the policy holders with a much larger investible surplus that they can invest in investment products like mutual funds that give much higher returns in the long term, compared to endowment or money back plans. If you are a term insurance policy holder, under some specific situations, you may opt for other types of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, for your specific financial needs.

4. Buying insurance for the purpose of tax planning: For many years agents have inveigled their clients into buying insurance plans to save tax under Section 80C of the Income Tax Act. Investors should realize that insurance is probably the worst tax saving investment. Return from insurance plans is in the range of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives close to 9% risk free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives much higher tax free returns over the long term. Further, returns from insurance plans may not be entirely tax free. If the premiums exceed 20% of sum assured, then to that extent the maturity proceeds are taxable. As discussed earlier, the most important thing to note about life insurance is that objective is to provide life cover, not to generate the best investment return.

5. Surrendering life insurance policy or withdrawing from it before maturity: This is a serious mistake and compromises the financial security of your family in the event of an unfortunate incident. Life Insurance should not be touched until the unfortunate death of the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of buying a new policy when their financial situation improves. Such policy holders need to remember two things. First, mortality is not in anyone’s control. That is why we buy life insurance in the first place. Second, life insurance gets very expensive as the insurance buyer gets older. Your financial plan should provide for contingency funds to meet any unexpected urgent expense or provide liquidity for a period of time in the event of a financial distress.

6. Insurance is a one-time exercise: I am reminded of an old motorcycle advertisement on television, which had the punch line, “Fill it, shut it, forget it”. Some insurance buyers have the same philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan from a reputed company, they assume that their life insurance needs are taken care of forever. This is a mistake. Financial situation of insurance buyers change with time. Compare your current income with your income ten years back. Hasn’t your income grown several times? Your lifestyle would also have improved significantly. If you bought a life insurance plan ten years ago based on your income back then, the sum assured will not be enough to meet your family’s current lifestyle and needs, in the unfortunate event of your untimely death. Therefore you should buy an additional term plan to cover that risk. Life Insurance needs have to be re-evaluated at a regular frequency and any additional sum assured if required, should be bought.

Conclusion

Investors should avoid these common mistakes when buying insurance policies. Life insurance is one of the most important components of any individual’s financial plan. Therefore, thoughtful consideration must be devoted to life insurance. Insurance buyers should exercise prudence against questionable selling practised in the life insurance industry. It is always beneficial to engage a financial planner who looks at your entire portfolio of investments and insurance on a holistic basis, so that you can take the best decision with regards to both life insurance and investments.

Article Source: http://EzineArticles.com/8691522

A Brief Introduction to Captive Insurance

Over the past 20 years, many small businesses have begun to insure their own risks through a product called “Captive Insurance.” Small captives (also known as single-parent captives) are insurance companies established by the owners of closely held businesses looking to insure risks that are either too costly or too difficult to insure through the traditional insurance marketplace. Brad Barros, an expert in the field of captive insurance, explains how “all captives are treated as corporations and must be managed in a method consistent with rules established with both the IRS and the appropriate insurance regulator.”

According to Barros, often single parent captives are owned by a trust, partnership or other structure established by the premium payer or his family. When properly designed and administered, a business can make tax-deductible premium payments to their related-party insurance company. Depending on circumstances, underwriting profits, if any, can be paid out to the owners as dividends, and profits from liquidation of the company may be taxed at capital gains.

Premium payers and their captives may garner tax benefits only when the captive operates as a real insurance company. Alternatively, advisers and business owners who use captives as estate planning tools, asset protection vehicles, tax deferral or other benefits not related to the true business purpose of an insurance company may face grave regulatory and tax consequences.

Many captive insurance companies are often formed by US businesses in jurisdictions outside of the United States. The reason for this is that foreign jurisdictions offer lower costs and greater flexibility than their US counterparts. As a rule, US businesses can use foreign-based insurance companies so long as the jurisdiction meets the insurance regulatory standards required by the Internal Revenue Service (IRS).

There are several notable foreign jurisdictions whose insurance regulations are recognized as safe and effective. These include Bermuda and St. Lucia. Bermuda, while more expensive than other jurisdictions, is home to many of the largest insurance companies in the world. St. Lucia, a more reasonably priced location for smaller captives, is noteworthy for statutes that are both progressive and compliant. St. Lucia is also acclaimed for recently passing “Incorporated Cell” legislation, modeled after similar statutes in Washington, DC.

Common Captive Insurance Abuses; While captives remain highly beneficial to many businesses, some industry professionals have begun to improperly market and misuse these structures for purposes other than those intended by Congress. The abuses include the following:

1. Improper risk shifting and risk distribution, aka “Bogus Risk Pools”

2. High deductibles in captive-pooled arrangements; Re insuring captives through private placement variable life insurance schemes

3. Improper marketing

4. Inappropriate life insurance integration

Meeting the high standards imposed by the IRS and local insurance regulators can be a complex and expensive proposition and should only be done with the assistance of competent and experienced counsel. The ramifications of failing to be an insurance company can be devastating and may include the following penalties:

1. Loss of all deductions on premiums received by the insurance company

2. Loss of all deductions from the premium payer

3. Forced distribution or liquidation of all assets from the insurance company effectuating additional taxes for capital gains or dividends

4. Potential adverse tax treatment as a Controlled Foreign Corporation

5. Potential adverse tax treatment as a Personal Foreign Holding Company (PFHC)

6. Potential regulatory penalties imposed by the insuring jurisdiction

7. Potential penalties and interest imposed by the IRS.

All in all, the tax consequences may be greater than 100% of the premiums paid to the captive. In addition, attorneys, CPA’s wealth advisors and their clients may be treated as tax shelter promoters by the IRS, causing fines as great as $100,000 or more per transaction.

Clearly, establishing a captive insurance company is not something that should be taken lightly. It is critical that businesses seeking to establish a captive work with competent attorneys and accountants who have the requisite knowledge and experience necessary to avoid the pitfalls associated with abusive or poorly designed insurance structures. A general rule of thumb is that a captive insurance product should have a legal opinion covering the essential elements of the program. It is well recognized that the opinion should be provided by an independent, regional or national law firm.

Risk Shifting and Risk Distribution Abuses; Two key elements of insurance are those of shifting risk from the insured party to others (risk shifting) and subsequently allocating risk amongst a large pool of insured’s (risk distribution). After many years of litigation, in 2005 the IRS released a Revenue Ruling (2005-40) describing the essential elements required in order to meet risk shifting and distribution requirements.

For those who are self-insured, the use of the captive structure approved in Rev. Ruling 2005-40 has two advantages. First, the parent does not have to share risks with any other parties. In Ruling 2005-40, the IRS announced that the risks can be shared within the same economic family as long as the separate subsidiary companies ( a minimum of 7 are required) are formed for non-tax business reasons, and that the separateness of these subsidiaries also has a business reason. Furthermore, “risk distribution” is afforded so long as no insured subsidiary has provided more than 15% or less than 5% of the premiums held by the captive. Second, the special provisions of insurance law allowing captives to take a current deduction for an estimate of future losses, and in some circumstances shelter the income earned on the investment of the reserves, reduces the cash flow needed to fund future claims from about 25% to nearly 50%. In other words, a well-designed captive that meets the requirements of 2005-40 can bring about a cost savings of 25% or more.

While some businesses can meet the requirements of 2005-40 within their own pool of related entities, most privately held companies cannot. Therefore, it is common for captives to purchase “third party risk” from other insurance companies, often spending 4% to 8% per year on the amount of coverage necessary to meet the IRS requirements.

One of the essential elements of the purchased risk is that there is a reasonable likelihood of loss. Because of this exposure, some promoters have attempted to circumvent the intention of Revenue Ruling 2005-40 by directing their clients into “bogus risk pools.” In this somewhat common scenario, an attorney or other promoter will have 10 or more of their clients’ captives enter into a collective risk-sharing agreement. Included in the agreement is a written or unwritten agreement not to make claims on the pool. The clients like this arrangement because they get all of the tax benefits of owning a captive insurance company without the risk associated with insurance. Unfortunately for these businesses, the IRS views these types of arrangements as something other than insurance.

Risk sharing agreements such as these are considered without merit and should be avoided at all costs. They amount to nothing more than a glorified pretax savings account. If it can be shown that a risk pool is bogus, the protective tax status of the captive can be denied and the severe tax ramifications described above will be enforced.

It is well known that the IRS looks at arrangements between owners of captives with great suspicion. The gold standard in the industry is to purchase third party risk from an insurance company. Anything less opens the door to potentially catastrophic consequences.

Abusively High Deductibles; Some promoters sell captives, and then have their captives participate in a large risk pool with a high deductible. Most losses fall within the deductible and are paid by the captive, not the risk pool.

These promoters may advise their clients that since the deductible is so high, there is no real likelihood of third party claims. The problem with this type of arrangement is that the deductible is so high that the captive fails to meet the standards set forth by the IRS. The captive looks more like a sophisticated pre tax savings account: not an insurance company.

A separate concern is that the clients may be advised that they can deduct all their premiums paid into the risk pool. In the case where the risk pool has few or no claims (compared to the losses retained by the participating captives using a high deductible), the premiums allocated to the risk pool are simply too high. If claims don’t occur, then premiums should be reduced. In this scenario, if challenged, the IRS will disallow the deduction made by the captive for unnecessary premiums ceded to the risk pool. The IRS may also treat the captive as something other than an insurance company because it did not meet the standards set forth in 2005-40 and previous related rulings.

Private Placement Variable Life Reinsurance Schemes; Over the years promoters have attempted to create captive solutions designed to provide abusive tax free benefits or “exit strategies” from captives. One of the more popular schemes is where a business establishes or works with a captive insurance company, and then remits to a Reinsurance Company that portion of the premium commensurate with the portion of the risk re-insured.

Typically, the Reinsurance Company is wholly-owned by a foreign life insurance company. The legal owner of the reinsurance cell is a foreign property and casualty insurance company that is not subject to U.S. income taxation. Practically, ownership of the Reinsurance Company can be traced to the cash value of a life insurance policy a foreign life insurance company issued to the principal owner of the Business, or a related party, and which insures the principle owner or a related party.

1. The IRS may apply the sham-transaction doctrine.

2. The IRS may challenge the use of a reinsurance agreement as an improper attempt to divert income from a taxable entity to a tax-exempt entity and will reallocate income.

3. The life insurance policy issued to the Company may not qualify as life insurance for U.S. Federal income tax purposes because it violates the investor control restrictions.

Investor Control; The IRS has reiterated in its published revenue rulings, its private letter rulings, and its other administrative pronouncements, that the owner of a life insurance policy will be considered the income tax owner of the assets legally owned by the life insurance policy if the policy owner possesses “incidents of ownership” in those assets. Generally, in order for the life insurance company to be considered the owner of the assets in a separate account, control over individual investment decisions must not be in the hands of the policy owner.

The IRS prohibits the policy owner, or a party related to the policy holder, from having any right, either directly or indirectly, to require the insurance company, or the separate account, to acquire any particular asset with the funds in the separate account. In effect, the policy owner cannot tell the life insurance company what particular assets to invest in. And, the IRS has announced that there cannot be any prearranged plan or oral understanding as to what specific assets can be invested in by the separate account (commonly referred to as “indirect investor control”). And, in a continuing series of private letter rulings, the IRS consistently applies a look-through approach with respect to investments made by separate accounts of life insurance policies to find indirect investor control. Recently, the IRS issued published guidelines on when the investor control restriction is violated. This guidance discusses reasonable and unreasonable levels of policy owner participation, thereby establishing safe harbors and impermissible levels of investor control.

The ultimate factual determination is straight-forward. Any court will ask whether there was an understanding, be it orally communicated or tacitly understood, that the separate account of the life insurance policy will invest its funds in a reinsurance company that issued reinsurance for a property and casualty policy that insured the risks of a business where the life insurance policy owner and the person insured under the life insurance policy are related to or are the same person as the owner of the business deducting the payment of the property and casualty insurance premiums?

If this can be answered in the affirmative, then the IRS should be able to successfully convince the Tax Court that the investor control restriction is violated. It then follows that the income earned by the life insurance policy is taxable to the life insurance policy owner as it is earned.

The investor control restriction is violated in the structure described above as these schemes generally provide that the Reinsurance Company will be owned by the segregated account of a life insurance policy insuring the life of the owner of the Business of a person related to the owner of the Business. If one draws a circle, all of the monies paid as premiums by the Business cannot become available for unrelated, third-parties. Therefore, any court looking at this structure could easily conclude that each step in the structure was prearranged, and that the investor control restriction is violated.

Suffice it to say that the IRS announced in Notice 2002-70, 2002-2 C.B. 765, that it would apply both the sham transaction doctrine and §§ 482 or 845 to reallocate income from a non-taxable entity to a taxable entity to situations involving property and casualty reinsurance arrangements similar to the described reinsurance structure.

Even if the property and casualty premiums are reasonable and satisfy the risk sharing and risk distribution requirements so that the payment of these premiums is deductible in full for U.S. income tax purposes, the ability of the Business to currently deduct its premium payments on its U.S. income tax returns is entirely separate from the question of whether the life insurance policy qualifies as life insurance for U.S. income tax purposes.

Inappropriate Marketing; One of the ways in which captives are sold is through aggressive marketing designed to highlight benefits other than real business purpose. Captives are corporations. As such, they can offer valuable planning opportunities to shareholders. However, any potential benefits, including asset protection, estate planning, tax advantaged investing, etc., must be secondary to the real business purpose of the insurance company.

Recently, a large regional bank began offering “business and estate planning captives” to customers of their trust department. Again, a rule of thumb with captives is that they must operate as real insurance companies. Real insurance companies sell insurance, not “estate planning” benefits. The IRS may use abusive sales promotion materials from a promoter to deny the compliance and subsequent deductions related to a captive. Given the substantial risks associated with improper promotion, a safe bet is to only work with captive promoters whose sales materials focus on captive insurance company ownership; not estate, asset protection and investment planning benefits. Better still would be for a promoter to have a large and independent regional or national law firm review their materials for compliance and confirm in writing that the materials meet the standards set forth by the IRS.

The IRS can look back several years to abusive materials, and then suspecting that a promoter is marketing an abusive tax shelter, begin a costly and potentially devastating examination of the insured’s and marketers.

Abusive Life Insurance Arrangements; A recent concern is the integration of small captives with life insurance policies. Small captives treated under section 831(b) have no statutory authority to deduct life premiums. Also, if a small captive uses life insurance as an investment, the cash value of the life policy can be taxable to the captive, and then be taxable again when distributed to the ultimate beneficial owner. The consequence of this double taxation is to devastate the efficacy of the life insurance and, it extends serious levels of liability to any accountant recommends the plan or even signs the tax return of the business that pays premiums to the captive.

The IRS is aware that several large insurance companies are promoting their life insurance policies as investments with small captives. The outcome looks eerily like that of the thousands of 419 and 412(I) plans that are currently under audit.

All in all Captive insurance arrangements can be tremendously beneficial. Unlike in the past, there are now clear rules and case histories defining what constitutes a properly designed, marketed and managed insurance company. Unfortunately, some promoters abuse, bend and twist the rules in order to sell more captives. Often, the business owner who is purchasing a captive is unaware of the enormous risk he or she faces because the promoter acted improperly. Sadly, it is the insured and the beneficial owner of the captive who face painful consequences when their insurance company is deemed to be abusive or non-compliant. The captive industry has skilled professionals providing compliant services. Better to use an expert supported by a major law firm than a slick promoter who sells something that sounds too good to be true.

Article Source: http://EzineArticles.com/9195416