Healthcare is one-fifth of the United States economy and it’s getting ready to change again. In light of this, we bring in one of the great leaders in the healthcare field, Fred Meijering. Fred is the Market President at Echelon Advisors, a commercial insurance and employee benefits brokerage firm that focuses in the self-funded, captive, and alternative risk-financing arenas. In the second part of this series on healthcare and what it means to you, Fred dives right into the topic of stop-loss and reinsurance in the captive plan. He gets into the process and the benefits of getting implemented into the captive health arrangement.
Listen to the podcast here:
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Healthcare And What It Means To You Part II
Stop Loss And Re-Insurance Inside A Captive Health Insurance Plan
Information is about thought. We have been inundated with technology while at the same time drowning for wisdom. Once this information is presented to you, you will begin to think about it. Our lives are analogous to the hamster on the wheel in our daily routine. Think about once you wake up, you do the same thing, in the same way, hoping for different results in your life. Once you shift how you think about yourself and your circumstances, you and those circumstances will begin to change. Do you want change in your life? Do you want a better life? I’m sure you’ve heard the idea that our thoughts somehow shape our reality we experience, that negative thoughts influence the world around us and bring about negative circumstances while positive thoughts somehow bring about positive circumstances. In order to change a culture, you don’t focus on the problem. The elephant in the room gets replaced once you start to focus your attention on the answer, not on the smelly beast that’s in the room.
There has been an entire industry of motivational speakers that have been created around this premise and almost all of us have been exposed to the tenets of positive thinking. If it works so well, why isn’t it that everyone that attends these seminars and reads these books become rich and successful and most of all, happy? If all we need to do is think positive thoughts, we should be able to create a positive world almost overnight, shouldn’t we? What’s wrong with that picture? I’ve spent almost twenty years working on this philosophy and interviewing people to find out why they continue to do the things they do, but expecting different results. I’ll share with you along the way with a set of tools and programs I think will not only be of tremendous benefit to you, but will literally allow you to become your potential and drive the maximum pleasure out of life.
Much of what I’m about to share with you will seem simple in concept. Most people miss the simple things in life. The best ideas are usually simple and easy to implement. I should caution you that there is a tendency to view these simple ideas from a surface level without really internalizing them and practicing them. Therefore, I recommend that you read this blog every day for 30 days so that these life-changing ideas can get down on the inside of you. Each time you read these ideas, you will discover something new. It’s not that it’s new, but it will be something that you’ve never really heard with your emotions. Those paddles on the side of your head that you call ears miss a lot of information the first time you hear something new. Just because you hear something once doesn’t mean that you’ve really listened to the message.
Rather than using your rational intellectual brain which analyzes information that causes paralysis by analysis and makes you take no action, use your creative, playful, risk-taking side and make an effort to incorporate these tools into your daily life. The reason I’m asking this of you is because I know that most of you will read this blog once and then go on to more information. That’s why I used the hamster metaphor earlier. You build synaptic connections in your brain once you hear something and start to really think about the information you’ve heard and then put that information to work in your life. I want you to use this new information and practice it and internalize it in your daily routine. Your success or failure comes about by your daily routine. It takes a commitment and a conscious commitment to make a positive change.
This can only occur on a subconscious level. The tools and reprogramming process must be used daily to make them work in your life for success. Here’s something I want for you to realize right now. The old self, your past daily thinking, will do everything in its power to prevent you from changing your life. It will come up with every excuse for not listening to the recording every day and put these tools to work. The old you is comfortable. It will scream at you not to change and to start thinking so it can stay in the known program.
The old you doesn’t want to think. It just wants to operate in the subconscious program that has been placed in your mind. The late Dr. McFarland said that 2% of the people think, 3% of the people think they think and 95% of the people would rather die than think. Your old self will procrastinate and make excuses for not using these ideas and tools. You need to ask yourself this question. Who is in charge of your life, you or your past programming? If there’s something better out there for you, wouldn’t it make sense for you to take advantage of this? Sure, it would. The real fight is this, make up your mind right now to take charge, because the old use comfortable. It has a built-in surviving mechanism to protect the status quo. That’s why change is so difficult for those people that don’t know how to change. It’s also why positive thinking on a surface level always fails.
Millions and millions of people attend positive thinking seminars or buy the books and the tapes each year, yet very few derive lasting benefits from them. If you’ve ever attended any of these seminars or read any of these books, you’re usually high from the emotional uplift for about two days. Then you go back to your old self again. It isn’t that the material isn’t valid or that it doesn’t work. It’s just the positive thinking and motivational stories deal only with a conscious mind. That conscious mind is not the engine that powers your life rather, it’s the subconscious mind or the unconscious portion of your mind from which your behaviors and attitudes spring forth. It’s going directly into the unconscious and rewiring how you think about yourself. Your future is the key to permanent and lasting change and that’s precisely what we’ll be addressing in this program.
Let me give you the philosophy behind this program and also answered the question of just how our thinking and beliefs on the subconscious level affect our wealth, health and our success or failure in any undertaking. What we believe that determines what we make true in our perception of reality, how we think about ourselves and the world around us. What we look for and what we take to be true is determined by our beliefs. Once you alter a belief, you can change reality or at least the reality that you experience. Through your belief, you form your reality. A friend of mine who’s a very successful and wealthy entrepreneur started out without a single dime in his pocket, and he was able to amass a great fortune in only a few years with a simple philosophy. I remember how he did it and I watched him in the early days of his career.
He envisioned his success. Sure, he had some setbacks and I watched how he handled them. He took a position of learning from what looked like on the outside as failure to a position of success on the inside. His thoughts convinced himself on a subconscious level that he had already acquired a great fortune when in fact he was really broke. In his mind, he became a multimillionaire. The circumstances that brought about reality then followed. Years later, I’m sure he adjusted his vision because now he’s a billionaire. I’m sure that you’ve heard similar stories. What we take to be true on a subconscious level becomes our reality if you will stay with it. Failure cannot cope with persistency, and every great leader has learned about being persistent. Luck has nothing to do with becoming successful as some people think. You must learn and apply what you have learned to have wealth and prosperity.
[bctt tweet=”The recipe for doing captive insurance wrong is always the same. It’s not having set up the captive correctly.” username=””]
Moneymaking skills are learned and it begins with a desire and a belief that it’s possible. What we believe is based on our perceptions and what we perceive depends on what we look for, and what we look for depends on what we think. We all know of those people who seem to be exceptionally lucky, but it’s not luck at all. It is created out of a core belief that good things should happen to them because they have already seen this play out on the theater of their minds. It is an expectation. Expect to be healthy, happy and prosperous, and you will be. If you can hold this vision in your mind, you can eventually hold it in your hand. You are bringing something from the invisible into the physical realm. It’s as simple as that. Life becomes a lot of fun once somebody explains the rules of the game to you.
You’ve probably seen this happen all the time, but in reverse, when you tell yourself that you’re having a bad day and sure enough, you do. What we believe determines what we make true, and that’s the entire premise of this idea. What I’m telling you here is nothing new. In fact, it’s a very old philosophy and great thinkers have been saying it for thousands of years. The Roman philosopher, Marcus Aurelius, said, “Our life is what our thoughts make it.” Napoleon Hill said exactly the same thing in the famous book, Think and Grow Rich, and everyone since has said the same idea. However, that doesn’t necessarily help you make it work better in your life until you learn how to apply those principles. You’ve got to break through an encrypted mind script that’s made up of years of negative programming. That’s why we’ve created the 1% club at Farley and Associates. The purpose of these tools is to deal with the issue of belief and behavior at the deepest level of your being and to anchor those new beliefs into your subconscious mind where your beliefs are formed and reinforced by your daily habits, your perception, and thus made true.
To create lasting change, you must reset the core beliefs that forms how you think and perceive your reality. Inside your subconscious mind, we have scripted what we see as true. What we accept to believe as true is true or becomes true, period. Any evidence contrary to our core belief is discarded or perceptually modified by our brains. If you’ve been told all your life that you’ll never amount to anything or believe that wealth is something beyond your grasp or if you believe all people that have wealth are evil, then that is the mind script that you’ve of welded into your subconscious mind. That’s your reality. Let me give you a very simple and very powerful tool that you can create the reality that you’d like to experience in order to attract happiness, health and prosperity in your life. To bring forth a loving and positive relationship to make you shine and glow and achieve in every area of your life, it’s a process I call As If. It is a process that every successful salesperson uses and every top CEO uses to become successful.
It’s a program of mentally rehearsing future events that anchor success images to a positive emotion through a simple visualization technique. You are the captain of your soul. You choose what you want in life. If you don’t like the results, change the program. I told you that this was simple, but a lot of people overlook it. By doing the mental rehearsal, it also programs our subconscious mind to bring forth a desired goal into reality. You’re probably familiar with visualization techniques and perhaps you’ve experienced them in your life. Most people try it for a while, but then they give up usually for two reasons. The first is that the old you creeps back in with excuses for not changing. It also may be because you have not been doing it right. Faith is seeing in your mind the things you can’t see with your eyes yet, so you never really notice any positive feedback to justify continuing doing it.
People tell me all the time that they’ve tried faith and what they’re really saying to me is that faith has tried them and found them wanting. There are certain laws including the law of faith that will work every single time you’ll work them. It’s a law. If you don’t think the law of gravity really works, go jump off a building and unless you can get the law of lift to really kick in fast, you’re not going to like the way the law of gravity works. I’m going to give you a super simple solution that’s going to work very well for you, but it’s up to you to use it and there are three steps in the process. Before I give them to you, let me give you a little tip. You must set up a regular time each and every day for your movie that will play on the theater of your mind.
There are 168 hours in a week and approximately 10,080 minutes in a week. I’m asking for you to spend five minutes a day. I’m talking about five minutes a day and you can achieve any worthwhile goal you desire. Here’s another trick of the trade. Do this first thing in the morning. You can control your mornings. Get up earlier. That’s how you control your mornings, but it’s really hard to control your nights. Stuff happens at night. You’re tired. You get home late. There are all kinds of excuses, but in the morning, there’s no excuse when you get up and get this done. Spend the best time of the day on you. It’s like saving money.
People that have no money think that they will pay all the bills first and keep what’s left over. Guess what? Nothing’s ever left over. Rich people save first, then they pay their bills, but that’s another subject for another time. Give yourself five minutes in the morning. You’re worth it. These five minutes must be exclusively devoted to the movie on the theater of your mind. Are you ready for a session? Get in a comfortable position. Close your eyes and listen to yourself breathe. Focus your attention on slowly taking deep breaths in on the sound of the air coming in and out of your lungs. Fill yourself relaxed. Do this breathing exercise five times. It will only take you about 45 minutes or so.
As you focus on your breathing, this is a simple relaxation exercise that will immediately alter your consciousness, putting your brain into an Alpha state. In fact, if you were to hook yourself up to an EEG machine while doing the simple procedure, you would see an increase in Alpha waves production emitting from your brain in only 45 seconds. The next step is to pick out an image of the past, a memory where you were extremely happy, and really get in touch with that experience. It doesn’t matter what it was or when it happened. The point is to conjure up a winning feeling or a positive emotion that you can then use to connect with your image of a future event. Perhaps this is an image of the moment you remember falling in love, receiving a standing ovation during a grade school play. A sporting event where you scored a point. You kicked a field goal or scored a touchdown. Go back in your past and pull out a very specific event that you will relive in detail.
Feel the pats on the back, the loving adoration. Remember the voices, the smell, and the colors. As you create this scene, let yourself re-experience all those winning feelings. What you’re doing here is bringing forward into your consciousness a positive emotion that will psychologically become connected with a future goal in your subconscious mind. This has an effect of anchoring that desire into your subconscious mind so that it is energized. It becomes a subconscious reality. Making it happen is really quite easy because if the subconscious mind believes it, it will alter your perception and we’ll look for it to make it into reality. I’ll talk more about that a little bit later. Once you’ve relived that positive emotion and feel those winning feelings welling up inside of you, the next step is to envision the future goal that you want to achieve as vividly as possible.
It can be through a middle picture, a word, a musical note or a taste. In fact, any sensory image that you can think of. Our brains think in pictures. When I ask you about your car, that picture pops up in your brain, the color and where it’s parked. Most people think in words unless you speak a second language. For instance, if someone spoke to me about a dog in Spanish, I would see the word perro, not the picture of a dog. The reason for that is that Spanish is not my first language. Spanish is my second language, and when learning Spanish or any language, in order to learn it, you have to think of the word first and then equate it to the picture. Each person is different. Some people respond better to pictures while others to words. For the most part, if you’re working in your first primary language, you’re going to think in pictures.
The key point here is to see yourself as if you’ve already achieved that goal, whether it is in a form of a picture or feelings. If it’s money, see yourself already having it. Perhaps see yourself checking your balance on your phone and seeing the large number in your bank accounts. If you only have one bank account, go set up another account because when you do this right, you can start filling up a number of accounts. If you want a dream home, set up an account and name it Dream Home. Start putting money in it each time you get paid. Don’t worry about the amount, just start it. Imagine you going into the bank with a big deposit. It’s your movie. Learn to script it.
Imagine telling the clerk you want so much money in this account and so much money in that account. Ask for some water while you wait. Imagine the cup they bring you and the cold water that you drink. Begin to feel it. Begin to get into the movie. Make it real and detailed. Look for colors. Notice the music playing in the bank lobby. See yourself walking down the street wearing the finest clothes, driving your dream car and hearing the whisper and comments of friends, wondering how you became so successful. If you’re a student taking a test, think of that big red-letter A-plus marked across the top of the exam. If you’re sales person, see yourself closing a sale. See your wife or your husband congratulating you, your friends telling you how great you are and that everyone would want to buy from you.
If you’re giving a speech, see the audience clapping for you and telling you what a great job you did. Let’s say you want a vacation home in Maui or Colorado. See yourself walking through the front door. Notice the color and the textures on the wall, the lawn, the roof, the entry area. Go ahead and walk through the entire house in your mind, filling in the details exactly the way that you would like them. Go outside to the backyard and see your negative edge pool looking down into the valley if that’s what you want. Be in your reality. Give your images as much richness and detail as possible and don’t worry at first if the images are a bit fuzzy, the process improves with practice. Tie in sounds and smells with touches.
In fact, the more senses and the greater the focus, the more ammunition that you’re giving to your subconscious mind to believe it and then to act on it. Your left brain will try to jump in and ask you, how are you going to do this? You need to put that dude on hold. It’s not up to you on how at this point that will come, doors will start to open and you will begin to expect something good coming to you. When doubt and fear and unbelief knock at the door, your faith will answer and doubt and fear and unbelief will vanish like a vampire at high noon. Let’s bring in Fred Meijering from Echelon advisors. You can reach them at EchelonRisk.com. Fred, let’s get right into the stop loss and the reinsurance.
On the topic of stop loss and reinsurance and the captive, it’s an interesting process because when you’re getting implemented into that arrangement, the first step is to secure a stop-loss contract with the carrier as if though you were an independent, traditional self-funded client. We get all of that premium and all those coverages in place. Once all of that is done in month two of your plan year, then you move into the captive, sign the appropriate documents and you seed or surrender that premium to the captive for your re-insurance coverage. That sometimes seems a little bit odd to people, but you no longer have just your own contract. It goes into the captive. It doesn’t change the rates at all because the rates were based upon this occurrence happening. That’s not a cost change or anything for that particular group.
It’s just that you become part of the reinsurance agreement inside of the captive, which is a really interesting phenomena because now you’ll have your specific deductible as you would with any self-funded plan. Let’s say that that’s $50,000 per plan participant. That means claims for any plan participant between $0 and $50,000 would come out of the claims fund of your plan. From $50,000 to $300,000, go up $250,000 and between, those claims in that space are paid for at the captive layer, which is shared across all of the other groups inside of that captive. That would happen for each plan person. It’s the specific deductible plus $250,000. If there’s another group in that captive who had $100,000 specific deductible, then their claims would be paid at a captive layer between $100,000 and $350,000 so $250,000 of coverage sits on top of your SPEC.
The really cool thing about that is it neutralizes the bad year for any particular group. What I mean by that is if you’re in a fully insured arrangement and you have a bad claim year, no fault of your own, then you’ll see that reflected pretty miserably typically in your renewal. In the captive space, we know that any group is going to have a bad year one in five years on average. We can prove that actuarially. When those claims hit in that captive layer, it’s spread out across all the groups. If there are twenty groups in your captive cell, then we know at least four are going to have bad claims here. Four of twenty that means sixteen are having a good year. It evens out the impact of that. Where you’ll see that is for renewal. We don’t beat you because you have a bad claims year. We know when and how to expect it and we spread that across the captive.
Like a fully insured plan, the employer has no clue of what his rate increase is going to be until they throw that on the desk for him.
[bctt tweet=”Different companies have different financial circumstances and arrangements that require professional consult. There isn’t one way to do it.” username=””]
That’s the cosmic surprise. I don’t know what’s happening with my claims all year. I have no ability to control how those things are handled, and here comes my broker at renewal with my 30% increase long after I have any opportunity to do anything about that. It’s really hard to budget in a business for this unsustainable increase that you have no way to anticipate. I don’t think that most businesses out there are growing at 30% a year, and they probably don’t have any line items in the most cases that increases 30% unless they’re growing rapidly and the revenue is there. Generally, that’s not the case. In the captive space, you at least have optics into that and can anticipate that and you can be proactively involved in mitigating that throughout the plan here so that you become informed every step of the way.
Would you say as far as a line item go, in most large companies it’s going to be payroll number one and then employee benefits number two for the most part?
We find that to be very common. In fact, it’s almost always top three depending on the business. There are some businesses that have high inventory costs and those kinds of things. It seems most of the time it’s top three or five expenses for the business and usually second behind payroll. To have that be a wild card on your finance statement, it’s pretty hard.
When you look at this and sit down, especially a CEO or a CFO, and say, “I have an opportunity to be able to get out ahead of this curve so it’s not a 30-day surprise. Now I have to figure out how to pay for it for the next twelve months.”
For years now, the industry has been changing planned designs, higher deductibles, and worst co-pays to try to bring those increases down, which means worse benefits for the employees in the 11th inning. We run their course now. There are not more places that a lot of employers can go because they already have a high-deductible plan. Additionally, being shackled with the employer mandate, if they have more than 50 employees, they have to provide it. It’s a conundrum.
For the company, when they go in and say, “Medical has gone up. We have to change the plan,” at some point in time, employees start to think, “I need to change my employer if they’re not paying attention to this.” You begin to lose key employees.
You’re exactly right, especially the youngest generation entering the workforce, they’re evaluating employment offers differently than the generations before them. They’re looking at things like social engagement and time off and what’s the full package including benefits. Comp is still important, but it’s more equal with these other kinds of things that the current generation is looking for. We see that here and I read about that regularly. You’re right, a good benefits plan can attract and retain employees or the opposite.
We’re doing a lot of hiring at Farley and Associates and I’m seeing a lot of people come through that are in their 50’s that are looking for a new career. I know in the back of my mind that an employer’s looking at their costs and having younger employees is going to make your plan work a lot better. The older employees and when I say older, I’m talking about in their 50’s and up, they’re really getting squeezed because this health insurance premium is just getting completely out of control. I know that you keep up with all of this with the Democrat and Republicans or bouncing this ball back and forth and nothing’s being done. They’re working to change it, but the last time they did that change, people didn’t like the way that turned out.
You bring up a really good point, and that’s the notion of age as an indicator for what premium should be. In the health plans that are age-banded, you’ll see that. It’s a safe assumption and actuarial data will bear this out, that in general, older people have more claims and those claims can tend to be for higher dollar. It seems it’s only appropriate then to blanket everybody over 50 with higher premiums because of that generalized trend. A unique element in the captive space is not doing that. How do you get away with that? We evaluate the risk. What is the risk? Let me give you a concrete example before I explain that any further. Consider my company. I’m in my 50s as is my wife, and we have two children in their early twenties. For the last umpteen years, we have been the best-performing family on our health plan.
We are all healthy, we all get an annual physical, and nothing follows. We have been the best risk as opposed to in just the six months, some of the other risk that our plan has endured for people under 40 in some cases under 30. Traumatic childbirth for example, unforeseen other kinds of medical conditions. These have been shock claims for people that are under 35. If you look at our health plan, I am the good risk over 50 and the young people are not. That sets that model upside down. How do you reconcile that or rectify that as you’re trying to develop premium? In the captive space, we would look at the risk and the risk has nothing to do with your chronological age. It has to do with the summation of the claims for your group.
We do that by looking at what the claims data is specifically and surgically, no pun intended, and looking at what those things are or aren’t and what that might hold for the future. The most precise way to determine an accurate and not a generalized premium is by determining what, what do we see, what is there, what do we anticipate as a result of that information? Groups are getting fair premiums for their circumstance as opposed to just generic platitudes from across a large group of people that may or may not apply to a specific group. Another unique hallmark in the self-insured and captive space is that a group gets to choose how they fund their claims. When you dissect premiums in this space, you’ll have fixed costs and claims costs. Fixed costs are comprised of things like what is the reinsurance and/or stop loss premium? What is the broker commission? What are the administrative fees for the third-party administrator?
In other words, it’s those things that are standard from month to month. Those are the fixed costs in the plan. The other part of the plan is the claims filed. This is where we pay for claims out of between $0 and whatever the specific deductible is, whether that’s $50,000 per planned participant or some other number based upon how the group wanted to evaluate their risk. How do we build a claims fund for group? They can do it in one of three ways. The first is as incurred, which means that they would get a monthly bill for all the claims from that month and then pay that bill to the third-party administrator, which means they’re not pulling any money or prepaying in any way. They just pay that monthly bill.
This is a great option for a group for whom cashflow is not that big of an issue that want to manage it more tightly so that they can roll with the ups and downs of what the claims might be. It can be a good way to manage your cash flow. In the first two months of a calendar plan year, in January and February, you typically won’t see any incurred claim or very few because they have a process through the system for that year. You’ll have low premiums for January and February and they’ll catch up with you later. The second way a group can pay for their claims is to prepay at the expected claims level. Think of that as a three-year average of the cost of claims from the previous three years. They just pay their fixed costs plus the expected claims fund amount and they prepay it and it goes into an account, at the money market account.
That makes a little bit of interest but it’s static in most cases. The claims that come in are taken out of that account by the CPA. You generally will run pretty good at that level. There might be months where you get a little bit of a balanced bill or a cash call for your own claims when it exceeds your claims filed. There will be other months where you’re building up a reserve for the next month, but generally claims funds funded at the expected level because it’s a pretty accurate look at the history and what that can be going forward. The third way is to fund your claims fund at the max level, which oftentimes 120% or 125% of your expected claims. Why would somebody do that? There are a number of reasons to do. The first a reason that I hear is because we don’t want to mess with balanced bills or cash calls in the plan year.
We want this to be more of a fixed arrangement, pay a monthly bill and then at the end of the plan year plus the runout, whatever money’s left, 100% of that in our captive arrangement is eligible for the employer to have back, to apply to the future or whatever they want to do with it. That’s part of the consult in what way do they want to fund claims? We see all three choices being made in an equal part just based upon the preference. That’s also something you can change in the middle of the year at any time that you want to. It’s not something you have to stick with for the whole plan year. If the fluctuation in the claims, if they’re paying at incurred is too dramatic and they want to neutralize that, they can pick expected or max claims funding. If they’re having a good cashier and they want to push as much money as they can legally into the captive, they can fund it in that.
Let’s talk about that because that’s going to be really important for employers as far as from a tax standpoint to do a max fund, I would think.
I think so too. If you googled captive insurance or something related to that, normally the first things that pop up are the examples of folks who have done it wrong, and the recipe for doing it wrong is always the same. It’s not having set up the captive correctly. You can put virtually any insurable risk into a captive. Where they do it wrong is that they didn’t properly assess and enter into that agreement with a defined insurable risk. What is normally required in defining that risk is actuaries and underwriters using their science and their experience and their methodologies to determine what a premium for that risk is. You can’t pay over that amount. If you do, you’re overfunding it, then you’re going to get in trouble or can, if you get caught. Those are the stories you’ll see.
You need an insurable risk. That risk has to be properly identified, qualified, quantified, and then you pay at that level. As that applies to the health space, you can max fund at 120% or 125% of claims into your health captive cell. You can do that without any worry of any trouble. Then you can leave that excess in your captive cell for whatever period of time. There are rules and regulations about how you can use that with how it comes out and how it goes in. We encourage folks who want to consult about that. Either get with our wealth advisors or their own or both to determine the exact right ways to do those things. There isn’t one way to do it. There isn’t a script that we can give because different companies have different financial circumstances and other kinds of arrangements that require professional consult on it. In most cases, that money, you can bring it back to yourself in a legally tax-advantaged way. That’s another aspect of this that can be favorable for clients.
[bctt tweet=”In general, if a health captive declares a dividend, you’ve got to do something with that money.” username=””]
Let’s say a company-funded at 125% and they’ve been doing this for several years and they have quite a bit of cash set aside. Would they be able to offer a key man life insurance product to their upper management and using those funds to do it?
The answer to that in general is yes, but you want to be careful about that transaction as it relates to a risk and other things and you can do that correctly. The thing that we choose to stay away from at Echelon is the micro captives that are based on life insurance. Those are just getting beat up by the IRS and it’s just not a space we’re willing to take clients. I don’t know about that. In terms of taking your leftover assets, your health plan and paying life insurance, there are correct ways to do that. There are a lot of questions that need to be asked before that can specifically happen, but it would be a good use of that I would think if that was something the company needed.
Let’s talk a little bit about the dividend piece to this thing.
It’s an exciting and sometimes not fully understood additional benefit of a lot of or most captive health arrangements. We talked earlier about the steps to get into a health captive. You first become traditionally self-funded in month one and then in month two, you see that that premium for your stop loss to the captive for that reinsurance agreement. What’s truly wonderful in addition to sharing claims across that captive layer at the end of the plan year and after the runout for that particular captive, the unused premium paid to the captive layer is available for the group to consider using for something else. Most captives will have at least an annual meeting. Oftentimes participation is mandatory. Among the things discussed at that meeting is how to handle the dividends. That dividend can be any amount. We see 10% to 20% is probably the normal range, 10% to 20% of premium of the captive layer of reinsurance.
Probably the most frequent distribution that’s made of that dividend is to have it be a dividend paid to each member inside that captive on a pro-rata basis. Meaning, based upon your premium volume, you’d get a part commensurate with what you paid into it. That’s in addition to a few pre-funded claims fund. You’re getting that money back if there’s any left in your claims fund. In addition to these things over the long-term being less expensive and being able to control and understand and mitigate your risk along the plan year to anticipate things like a renewal increase or not, you get 100% of your claims fund back, which is not common in the level-funded and self-insured space, but you’re also eligible for any dividends from the captive way of reinsurance. Now we’re compounding advantages to this arrangement. That can make this advantageous for a group.
This is the way under this scenario to somewhat regulate your expenses, as well as your dividend piece of this. If you had a great cash year, you may not want to take a dividend. It depends on where you are in the business cycle.
You might want to make other kinds of choices with that. In general, if a health captive declares a dividend, then you’ve got to do something with that money. You don’t necessarily have to repatriate that if you’re offshore, but you will want to consult on what other options are at that point.
Let’s see if you can demystify this offshore terminology a little bit. When you talk about offshore, what does that mean to an employer that is not familiar with that term?
When you’re investigating a captive health arrangement for your group to take control of your healthcare spend and all the other advantages we discussed, one of the things that you’ll get to consider as a part-owner or a sole owner of the health captive is where that captive is done and filed. It is an entity. There are lots of captive-friendly states in the United States. There are some that aren’t so friendly and you can domicile it in any state in the US if you wanted to or you can domicile it offshore. What you’ll hear as the advantages of domiciling it offshore in places like the Cayman’s or Bermuda is the favorable tax treatment. You’re not paying US corporate tax, for example. That’s appealing to people.
In the case of our offshore captives, the money never leaves the continental United States. Ours are set up in trusts in New York. The money doesn’t leave here. It just is credited in the domicile, wherever that is. Initially, if you’re not familiar, that can sound shady or strange or something. When you investigate it and we encourage that investigation, you’ll see that it’s really legitimate. The ways in which we do are based upon US Law. If you never get comfortable with the notion of offshore or if your business works in a space that prohibits that or you don’t feel that that’s right for your company, then you can domicile it within the United States.
The paperwork that’s offshore, the money stays in New York, so there’s not a wheel barrel of dollar bills that are leaving from America over to some other country.
It is recognized there, audited and accounted for there, but the money never leaves the continental United States.
It’s more of a tax strategy and a business arrangement that Congress has set up and has implemented in the US Codes.
Any company wanting to look at this, I would encourage them to fully understand all of that and include their advisers if they want to. Also, we would have advisors they could talk to fully understand those choices. In terms of how the health plan works, they wouldn’t see a difference as it relates to where the captive is domiciled.
It has no difference with the PEO network or any of the benefits or anything else. It’s just a paper transaction in order to take maximum advantage of the rules and regulation and the tax laws.
The networks are all based in United State and are recognizable. The reinsurance and/or stop loss is all based in the United States and recognizable. All parts of the health plan is that the transactional part where the employees would place all herein and something that they would recognize and have seen before.
About Fred Meijering
The executive team at Echelon Advisors has a great diversity of experience in the insurance and alternative-risk financing business. Practicing at all levels and in various different positions, from small boutique shops to the largest of national brokers, the wealth of knowledge and experience they all brought to the table collectively, ultimately came together to create Echelon Advisors.
The business environment is changing, and organizations are having to become more and more competitive to stay relevant. Because of this, we decided to focus our organization’s strategy on partnering with our clients to create innovative insurance solutions to help position them for success.