PROFIT SHARING PROGRAMS

REINSURANCE COMPANY PROGRAM

This type of program involves the creation of another corporate entity that will typically operate as an insurance (or reinsurance) company.  This insurance company will be allowed to “reinsure” insurance business and can be formed in any of the following:

 

1) The U.S. and operate as a domestic company subject to U.S. state regulation,

2) An offshore domicile that operates as a U.S. company (after making a 953(d) election), and is therefore subject to U.S. taxation and “offshore” regulation, or

3) Actually operate offshore as a foreign corporation (subject to Subpart F of Internal Revenue Code) and offshore regulation.

 

The cost of formation of the Reinsurance Company would vary by domicile.

 

 

ADVANTAGES

 

Most potential income – The formation of a Reinsurance Company creates the potential for the greatest amount of income.  There are potential consequences so you should strive to obtain a qualified, knowledgeable and reputable administrator.

 

Insurance Company & Establishment of reserves  – The Reinsurance Company will first off be an “insurance company” and will be able to establish reserves, enabling the Reinsurance Company to set aside more funds for the payment of future claims (or profits).  Secondly, since it is an “insurance company”, there will be no corresponding “double taxation” on the Direct Writer’s books as occurs in the other revenue sharing programs.  And finally the company will be taxed at the applicable tax rate of the Reinsurance Company.  In other words, taxes can be paid (1) later and (2) possibly at a lower rate than the other revenue-sharing methods.

 

Ancillary benefits – Since there is another corporate entity, the ownership of this company can be used for (1) additional key employee benefits (i.e. Golden handcuffs), (2) estate planning and (3) long-term earnings accumulation.

 

 

 

DISADVANTAGES

 

Most complex structure – Since another entity is involved, this method is the most complex.

 

Ceding Fees – This can be either a positive or a negative.  A Reinsurance Company provides the opportunity to make the most income, but it also has the ability to pay the most fees (to the Direct Writer or Ceding Company or administrator).  It is possible for most, if not all, of the potential profits to be consumed, not from claims, but from excessive “ceding fees” to the ceding company.  Care should be taken that these fees are not excessive.

 

Method of ceding business – The Direct Writer “cedes” business and the Reinsurance Company “assumes” the business.  It is almost always most beneficial for the Reinsurance Company to assume the premiums on a WRITTEN basis (or immediately) as opposed to an EARNED basis (over the life of the policy).

 

 

 

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