If you’ve had clients ask, “Is this captive thing even legit?”—you’re not alone.
Captives have a branding problem. They sound too good to be true. Some shady players have abused them. Throw in a few aggressive promoters who promise tax magic, and suddenly it’s easy for clients to lump the whole thing in with offshore scams or get-rich-quick gimmicks.
At Captive Coalition, we work exclusively with independent agents to help truly understand captives for skeptical clients. When clients are less familiar with captives, their skepticism is understandable. We’ve seen what happens when they’re promoted for the wrong reasons. But we’ve also seen what happens when they’re used correctly: transparency, stability, and real financial upside for well-managed businesses.
This article breaks down why some clients see captives as a scheme, what red flags to watch for, how to reframe the conversation so clients understand what captives are really for, and whether they’re the right fit for your best clients.
Why Do Clients Think Captives Are a Scheme?
Honestly, some of it is earned.
The biggest offenders? Promoters without insurance licenses (usually wealth managers) who pitch captives as a tax loophole, not a risk management tool. They lead with phrases like “asset protection” or “tax reduction” and completely skip over insurance fundamentals.
If your client hears that first, their radar goes off. And it should.
Yes, your client can profit in a captive, but only if you’re managing risk well. Only if you’re funding it properly. And only if you’re committed to long-term safety improvements.
Here’s the truth you can share with your clients:
- Captives require real capital and collateral. Collateral is a line of credit or cash used to secure claims payment.
- A bad year will happen. It’s not “if.” It’s “when.”
- Note: Even clients with the best risk programs will have a bad claims year once every five or six years.
- Note: Even clients with the best risk programs will have a bad claims year once every five or six years.
- If they don’t take risk management seriously, a captive will punish them. Captives do have their disadvantages for clients who are careless.
Do Clients Have Full Control Over Their Money in a Captive?
This is a common misconception. A misconception clients need to clearly understand.
If they think joining a captive means they get to invest premium dollars however they want, they’re in for a reality check.
Here’s how to explain it:
- In a group captive, funds are pooled. Investments are conservative—usually high-quality corporate or government bonds—because the priority is claim payment, not aggressive returns.
- In a single-parent captive, there’s a bit more flexibility, but regulators still require strict oversight. You can’t just move funds around freely. It’s still an insurance company.
Most captives allow members to access surplus after claims years close, but only after obligations are met and reserves are fully funded.
Bottom line: It’s not a checking account. It’s not a hedge fund. It’s a long-term insurance and financial strategy with guardrails in place to make sure it works as intended.
To understand these types of captives, read our article on the pros and cons of single-parent and group captives.
Should Clients Be Cautious About Offshore Captives?
Many clients hear “offshore” and immediately think sketchy. But in reality, most offshore captives are fully compliant, highly regulated, and often taxed just like a U.S. corporation.
The concept to share with clients:
It’s not about location so much as it’s about how the captive is structured.
Most reputable offshore captives elect 953(d) status, meaning they’re taxed as U.S. entities. They follow strict accounting rules, file U.S. returns, and operate just like an onshore captive, except in a jurisdiction with more experience or infrastructure around captives.
Why are some captives still offshore?
- Some domiciles have been doing this for decades (long before U.S. states got serious about captives)
- They often offer more favorable regulatory environments—but not fewer rules
An offshore domicile doesn’t make a captive shady. But how it’s pitched (and who’s promoting it might.
To identify if someone is shady when promoting captives, read our article on talking to the right person about captive insurers.
Why Do Most Business Owners Actually Join Captives?
Businesses join captives because they’re frustrated when dealing with the insurance hamster wheel.
Most of your clients aren’t trying to pull one over on the IRS. They’re just tired of:
- Paying more every year despite managing risk well
- Getting zero credit for a clean loss history
- Having no control over premiums, claims, or where their money goes
Captives give them a way out of that cycle.
They don’t eliminate risk, but they reward good behavior. When your client builds a safer business, controls losses, and stays proactive, they keep the savings instead of handing it to a carrier.
It’s a long-term play. And that’s exactly why captives aren’t a scheme. They’re a long-term strategy. One that works for disciplined, forward-thinking businesses who are sick of getting punished for doing things right.
Are More Businesses Moving to Captives?
Absolutely.
More business owners understand that the traditional market often punishes good behavior and rewards volume, not performance.
Captives are gaining traction because they offer:
- Transparency over where every dollar goes
- Control over claims handling and renewal pricing
- Incentives for managing risk well—not just buying coverage blindly
But here’s the catch: captives aren’t for everyone. They require commitment, capital, and a strong safety culture.
To get rid of the misconceptions and learn more about captives, read our Captive Insurance 101 Guide for Independent Agents. That way, you can better help clients and maintain your book of business.
If you’re ready to go further, become a member of Captive Coalition for FREE to access additional resources, tools, webinars, and training to better help your clients and maintain your book of business.
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