Selective Settlements International

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1 Prepared by: Selective Settlements International Marketing Financial 2960 E. Battlefield Springfield, MO Fax: SSI Home Office 1776 Legacy Circle, Suite 104 Naperville, IL SSI Operations Center 8800 S.E. Sunnyside Road, Suite 101N Clackamas, OR 97015

2 INTRODUCTION Selective Settlements International (SSI) is one of the oldest structured settlement companies in the United States. Headquartered in the Chicago, Illinois area, we have offices located throughout the country. SSI is a voting and charter member of the National Structured Settlement Trade Association. Our consultants are also active in many local claims organizations. Over the years, we have participated in thousands of structured settlements for personal injury cases, wrongful death, medical malpractice claims, workers compensation cases, Jones Act and Longshore cases, FELA disputes, environmental claims, condemnation and divorce. Once a claim has been identified as a potential candidate for a structure, we urge our clients to bring us into the case at the earliest opportunity. Our staff consultants are experienced professionals able to provide innovative settlement options to facilitate the negotiation process. At no cost to our clients, we provide on-site consultation, attend settlement conferences, generate computer proposals and investment comparisons, assist with set-up for medical trusts, and answer questions about the financial security of insurance companies. Our services extend the duration of the negotiations and we are able to revise and create new plans as necessary. A structured settlement utilizing a reduced life expectancy, or rated age, can offer the insurer or self-insured, a significantly reduced cost for providing the claimant a secure, lifetime income stream. This is true even when the cause of the reduced life expectancy is unrelated to the incident that gave rise to the claim. SSI will carefully review each claim to insure the most favorable rated age and pricing with the most competitive annuity rates from the highest quality life insurance companies. Negotiations should center on the injured party s needs assessment rather than the cost of the structured settlement package. This helps to focus attention on the array of settlement possibilities and away from subjective cash demands and offers. Seasoned negotiators find that offering a settlement package that includes a structure improves their chance of settling a claim, even if the structure itself is ultimately rejected. The staff at Selective Settlements also assists in post-settlement services. We review all settlement agreements and work with the attorneys to ensure the appropriate structure settlement language is included in the documents to guarantee the tax-free status of the settlements. In many instances, we prepare documents for our clients. Working with the life insurance companies, we ensure the proper completion of all paperwork so benefit payments can begin promptly. Further, SSI will aid in the administration of a file by updating address changes, addressing any problems with payments, and handling all inquiries, adjustments and questions that may occur. Please accept the information contained herein as an introduction of our services. We invite you to call if we can answer any questions about our services or assist on a specific case.

3 TAXATION History Traditionally, law suits for personal injury or death were settled by the payment of a single, immediate lump sum of cash. The tax treatment accorded such a payment was simple: Under Section 104(a)(2) of the IRS Code, an amount received on account of personal injuries or sickness is not part of the claimant s gross income [Section 104(a)(2) stipulates that gross income does not include the amount of any damages received {whether by suit or agreement and whether as lump sums or as periodic payments} on account of personal injuries or sickness }. However, if a lump sum settlement amount is invested, the income derived from it is taxable. The theory underlying the tax treatment of Structured Settlements is that the claimant is receiving a series of lump sum payments, and as such, each one should be accorded the same tax treatment as a single, immediate lump sum payment. While the theory seemed legally sound, and this type of settlement flourished, no formal position was enunciated by the IRS until the late 1970 s. At that time, requests for rulings caused the IRS to issue Revenue Ruling , which provided the basic guideline on which the favorable tax treatment would depend. Similarly, in the Private Letter Ruling , where a Trust was established for the benefit of a minor claimant to provide him with health care services, a suitable home environment, special educational services related to the claimant s medical condition, and any other reasonable, customary or proper expense incurred primarily for his health, welfare or well-being, the payment received by the plaintiff was excludable from gross income under Section 104(a)(2) of the Code. Constructive Receipt In order to receive the favorable tax treatment, the claimant must avoid constructive receipt of the funds. In effect, each future payment must be fixed and determinable and the claimant must not evidence any elements of ownership of the funding device. For example, the claimant must not have the right to accelerate, defer, increase or decrease any future payment, change the beneficiary or rely on anything more than the general credit of the owner of the funding device. Detailed in code regulation Section , Constructive receipt amounts to: power over the funds; artificially manipulating time of taxation; funds availability upon demand; authority to require the sum paid in full; ability to change beneficiary.

4 Qualified Assignment While some defendants are willing to enter into a settlement agreement based on periodic payments and assume full responsibility for such, others are interested in terminating their continuing liability to make the periodic payments to the claimant. To accomplish this relief, a third party acceptable to both claimant and defendant would receive a lump sum (the exact amount necessary to purchase the funding device, e.g. an annuity or US treasury product) from the defendant, and the defendant would be completely relieved from any further obligations to the claimant. Under these circumstances, the assuming third party would not realize gross income when it receives the lump sum, according to Private Letter Ruling ; June 24, The above tax positions were formalized on January 14, 1983, when the President signed Revenue Bill HR 5470, which amended Section 104(a)(2) to specifically exclude from the gross income of a claimant, moneys received as compensation for sickness or injuries:...whether by suit or agreement and whether as lump sums or as periodic payments. A companion section of that Revenue Bill became the new Section 130 of the IRS Code, which specifically deals with the Assignment Agreement. Now, when the lump sum is transferred to the assuring party, it is not considered to be gross income, to the extent that such amount does not exceed the aggregate cost of any qualified funding asset. It is interesting to note that the only qualified funding assets under the Section are:...any annuity contract issued by a company licensed to do business as an insurance company under the law of any state (an annuity)... or obligation of the United States (US Treasury Bond). Tax Reform The President s tax reform proposal originally included taxation to an assignee on annuity income present in a structured settlement. The House later adopted a proposal which limits structured settlements to actions originating in a physical injury. Section 130(c) reads as follows for assignments entered into after December 31, 1986: (c) QUALIFIED ASSIGNMENT For the purposes of this section, the term qualified assignment means any assignment of a liability to make periodic payments as damages (whether by suit or agreement) on account of personal injury or sickness in a case involving physical injury or physical sickness [new language in bold]. Non-physical personal injury actions can still be structured; the annuity must be owned by the self-insured or casualty insurer.

5 Miscellaneous Revenue Act of 1988 Federal legislation in 1988 now permits a plaintiff to become a secured creditor of an assignee. Section 130(c)(2)(c) was removed from the code - the section requiring that a plaintiff be no more than a general creditor of the assignee. Under the bill, a liability assignment is treated as a qualified assignment notwithstanding that the recipient is provided creditor s rights against the assignee greater than those of a general creditor. The bill also provides that no amount is currently includible in the recipient s income solely because the recipient is provided creditor s rights that are greater than the rights of a general creditor. The repeal of the general-creditor requirement is effective for assignments entered into after November 11, The general-creditor requirement was not repealed in non-assigned cases.

6 INSURANCE COMPANY RATINGS As of October 29, 2008 COMPANY A.M. BEST MOODY S S&P FITCH AILIFE AXV Aa3 A+ AA- ALLSTATE A+XV Aa2 AA ~ AMERICAN GENERAL AXV Aa3 A+ AA- AVIVA LIFE A+X ~ AA- AA- HARTFORD A+XV Aa3 AA- AA JOHN HANCOCK A++XV Aa1 AAA AA+ LIBERTY AIX A2 A- ~ METLIFE A+XV Aa2 AA AA NEW YORK A++XV Aaa AAA AAA PACIFIC LIFE A++XV Aa3 AA AA PRUDENTIAL A+ XV Aa3 AA AA SYMETRA A XIII A2 A- A+ ~ Not Rated

7 REPRESENTATIVE CLIENT LIST AEGIS Aon Corporation/Aon Risk Services American Reinsurance Company California Transportation Department California School Excess Liability Fund Chicago Housing Authority Chicago Tribune City of Eugene, Oregon City and County of Honolulu City of Palm Springs, California City of Portland, Oregon Colonial Insurance Co. of California Country Companies Housing Authority Risk Retention Fund Howard University Hospital Island Insurance Companies James River Corporation Kaiser Foundation Hospitals Legacy Health System Nebraska Med Mal Excess Fund Transportation Claims, Inc. Catholic Mutual Group City of Omaha U.S. Department of Justice, District of Nebraska North Pacific Insurance Group Pacificorp Physicians Reciprocal Insurance Portland General Electric SAIF Corporation State of California State of Hawaii State of Montana State of Oregon Sublimity Insurance Company Tri-Met Transportation District U.S. Department of Justice U.S. Aviation Underwriters U.S. Department of Health & Human Services Veteran s Administration Viking Insurance Virginia Surety

8 STRUCTURED SETTLEMENT GLOSSARY A.M. BEST RATING: Best s Insurance Reports provide financial information concerning life insurance carriers. These reports include two different ratings. The overall rating assigns a letter indicator based on the company s performance relative to the rest of the industry: A++ or A+ (Superior) is the highest rating possible. The financial size category rating is based on adjusted policyholders surplus and ranges from category I at up to $1,000,000; category V from $10,000,000 - $25,000,000; category X from $500,000,000 - $750,000,000; to category XV at $2,000,000,000+. ANNUITY: A stipulated stream of payments made at stated intervals, either for life or for a certain number of payments. ANNUITY CERTAIN: Guaranteed payments made to the annuitant or to his/her estate at periodic intervals for a predetermined number of years only; payments are not life-contingent. ASSIGNMENT AND ASSUMPTION: A transfer of some right, interest, or obligation from one person or entity (the assignor) to another (the assignee) and the corresponding assumption of that right, interest, or obligation by the assignee. ASSIGNMENT FEE: An administrative expense, usually a nominal flat dollar charge for each case, assessed in cases where the periodic payment obligation is assigned to a third party. CERTAIN PERIOD: Also known as guaranteed period. The pre-defined period over which payments will be made regardless of whether or not the annuitant is living. If the annuitant dies within the certain or guaranteed period, payments remaining in that certain period will be made as they come due to the estate of the annuitant. CLAIMANT: Party bringing claim against the insurance company, self-insured, or workers compensation carrier. COLA: Payments which increase periodically at a fixed percentage rate. CONSTRUCTIVE RECEIPT: Periodic payments made to a claimant under IRC section 104(a)(2) are excludable from claimant s gross income so long as the claimant has neither actual nor constructive receipt of the sum spent to fund those future payments. Constructive receipt occurs when the claimant or his representative has control over the disposition of the money, when the present value is set aside specifically for the claimant, or when the funds become available to the claimant without qualification. DEFERRED ANNUITY: An annuity with payments later than one modal period after purchase of the annuity, e.g. a monthly income annuity where the first payment is due more than one year after purchase. GUARANTEED (CERTAIN) PAYMENTS: Payments that are not contingent upon how long the annuitant lives. If the annuitant dies, payments will be made as they become due to the decedent s estate. GUARANTEED PAYOUT: The sum of all certain payments (i.e. guaranteed lump sums, annuities certain and the payments generated during the certain period of a life-contingent annuity). This amount may also include money paid out initially at the time of settlement. GUARDIAN AD LITEM: A person appointed by the Court during the course of litigation who protects the interest of a minor or an incompetent who is a party to a suit. IMMEDIATE ANNUITY: An annuity with payments commencing one modal period after the purchase of the annuity. Example: An immediate monthly annuity commences with payments one month after funding.

9 IRC 461(h): Statute which affects the way self-insureds treat their long-term structured settlement obligations. Prior to the enactment of this section, some self-insureds accrued the total of the future payouts and claimed that amount as a deduction in the tax year in which the settlement was concluded. This statute allows deductions only when economic performance occurs (each time a payment is made to the claimant). LIFE EXPECTED PAYOUT: The total dollar payout under a life-contingent annuity plan where the payout is calculated on the annuitant s statistical life expectancy. LUMP SUM PAYMENT: Payment of a fixed sum at a specified future date. MINOR S COMPROMISE: Proposed settlement of a minor s claim must be approved by the court. NORMAL LIFE EXPECTANCY: The number of years, statistically determined, that a person with a given sex and chronological age can be expected to live. POLICY FEE: A fee, ranging typically between $100 and $500, which is assessed on smaller premium cases (typically cases below $50,000). POLICY OWNER: In a structured settlement, the claimant cannot be the owner of the annuity policy. The obligor of the future payments (insurance company, assignee, self-insured, or work comp carrier) is the policy owner. PREMIUM: The cost of the annuity PREMIUM TAX: A tax on the purchase of annuities imposed by some states. The incidence of a premium tax is dependent on the domicile of the policy owner or the domicile of the life insurance company. PURCHASE DATE: A specified date for buying an annuity used in calculating its cost. QUALIFIED ASSIGNMENT: An assignment of a defendant s/insurer s obligation to an assignee pursuant to IRC Section 130. QUALIFIED FUNDING ASSET: If the structured settlement involves a Section 130 assignment, annuities or US Obligations are the only permissible funding assets. RATE OF RETURN: The discount rate at which the present value of the benefits equals a particular present value, usually the cost of the proposal. SUBSTANDARD LIFE EXPECTANCY (RATED AGE): Life expectancy which is shorter than normal due to a physical/medical condition. Substandard life expectancy is utilized with a rated age representing the subjective age which a person s life expectancy is based. For example, if a 24 year old female is deemed to have a rated age of 54, the life insurance company is stating that for purposes of quoting life-contingent annuities, it would be priced using the life expectancy of a 54 year old woman.

Frequently Asked Questions

Structured Settlements Frequently Asked Questions How can I change my address? There are three ways to make an address change: 1. Visit us online and download a Change of Address form and fax it to us.