Insurance payments form a big part of administrative operating expenses in certain industries. Therefore, many small businesses find themselves locked out from accessing affordable insurance plans. Self-insurance and captive insurance are substitutes to traditional insurance plans. They have helped shield businesses from financial loss. Both insurance agreements provide diverse effective approaches for financial protection. They also have various benefits and drawbacks.
Self-Insurance
Self-insurance involves putting aside money to insure yourself or business against certain risks. For example, a real estate investor can spare some cash every month to cover potential damages from natural disasters. In addition, a small business can have a savings account to cover shortages of money caused by credit customers with default payments. In some states, employers must meet certain requirements like worker’s compensation before using self-insurance to cover insurance costs. Companies that meet the requirements are granted the right to self-insure.
Advantages
Saving money for emergencies is an important business strategy and a great way of protecting businesses from losses. Some insurance coverage like the comprehensive automobile coverage can easily be covered with cash savings instead of a commercial insurance plan.
Disadvantages
Self-insurance has various drawbacks. Some types of insurance like worker’s compensation can pay out benefits far past a company’s ability to set aside money for the payout even after many years of saving. Other types of insurance such as general liability can be quite unpredictable and do not guarantee that potential problems will be covered by savings.
Captive Insurance
Captive insurance works almost in the same way as self-insurance, but it is a bit costly to maintain and more complex. In this type of insurance coverage, business owners pay premium on a regular basis to insurance companies just as they would do with commercial insurance. For example, a group of local farmers can come up with an insurance company to protect themselves against losses from crop damage.
Advantages
Captive insurance is very similar to a commercial insurance contract and often share the same benefits. It also allows policy holders the power to establish their own prices and decide their benefits. The premiums for captive insurance is much lower than those of conventional insurance because captive insurance is designed to help policy holders get substantial financial benefits than those of conventional insurance.
Captive insurance services are designed to help business owners insure themselves. This type of insurance is suitable when retail insurance is expensive or does not cover all the risks that a business owner needs to be covered. Although captive insurance companies are not explicitly set up for tax purposes, policyholders can benefit from significant tax breaks including tax deductible premiums, tax free premiums, and estate tax benefits.
