Paul A. Hathaway, LIC, CSSC Christopher J.

Hathaway, MBA

What we will cover

What you dont know about Annuities Can Cost you Money How are Annuities Being Used?
Annuitized Settlement? A Quick Primer The Truth about Annuities Medicare Set Asides

Substandard Age Rating

Structuring your offer: Three Ways to Save Social Security Offsets What to do with those Old Dog Claims?

Annuities as Substitute Payers

Buy and Hold Annuities Why Would a Claimant Want Annuity Payments? Face-to-Face Settlement Consulting

Annuity Long Term Yield = 4.5% Federal tax bracket 20.00% MI Tax 2012 4.35% Detroit Local Tax 2.5 % 26.85% effective rate Equivalent Taxable Yield = 6.13%
Jumbo CD 5 Yr = 1.75% US Treasuries 30yr. = 3.1%

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General Liability Employment Executive Buy-Outs Environmental Work Comp MSAs SSDI offsets Substitute Payer Indemnity Buy & Hold

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Structured Settlements A Quick Primer Structured Settlement

Any series of payments made other than a single lump sum amount. A financial package funded with an annuity designed to meet the needs of the claimant and is agreed to be paid by the defendant or its insurer.

A negotiating tool Provides flexibility to the negotiation process Uses periodic payments rather than a lump sum to settle Periodic payments are tailored to meet present and future needs Financial arrangement is a mix of immediate cash and deferred income Benefits are tax-free in physical injury and workers compensation cases Maximizes settlement dollars Bridges the gap between demand and offer

Why Use Annuities in your settlements?

Controls claim dollars Reduces operating expenses Loss ratio is improved Dollars are returned to surplus (Profits) WC Boards/Commissions are receptive and sometimes demand Creates goodwill -enhances public image Eliminates risk of litigation

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Example Female Age 55, NLE 271 Temporary Life Annuity Annual Payment for 26 years $728.00 Your Total Cost $11,211.00

Medicare $20,150.00

Allocation2

Seed Money (CASH) $1,575.00

Your $avings
$8,939.00

$50,220.00

$3,775.00

$1,814.00

$24,337.00

$25,883.00

$102,300.00 Example Male Age 55 NLE 271

$7,692.00

$3,696.00

$55,271.00

$47,029.00

Medicare Allocation2 $20,150.00

Seed Money (CASH) $1,575.00

Temporary Life Annuity Annual Payment for 26 years $728.00

Your Total Cost $10,770.00

Your $avings
$9,380.00

$ 50,220.00

$3,775.00

$1,814.00

$23,066.00

$27,154.00

$102,300.00

$7,692.00

$3,696.00

$52,292.00

$50,008.00

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Substandard ratings issued by life insurer Based on medical condition of claimant

Results: Shorter life expectancy Lower annuity cost

Qualifying medical conditions do not have to be related to the industrial accident Used in determining MSA allocation

Date of Birth: Terms of Benefit:

MALE 10/26/1988 Beginning in one month, $1,000 payable monthly guaranteed 20 years, compounding 3% annually
Rated Age 29 35 35 Std (age 22) 37 34 Standard Cost $474,641 $460,920 $479,187 $454,137 $464,663 $416,946 Discount Cost $434,913 $394,326 $423,485 $454,137 $386,699 $375,124

Annuity Company Allstate Pacific Life John Hancock Metropolitan New York Life Prudential

Savings of 7-32 % on any ONE case may not be significant in the big picture, but spread over 100s of cases, it has a significant impact on claims dollars spent.

Annuities Save Money on MSAs 3 Ways

Substandard Age Ratings & Medicare Medical Set-Asides (MSA)
Three ways Structures Save Money:
1.) 2.) 3.) Rated Age Reduces Life Expectancy vs Normal Life Expectancy ANNUITIZING Takes advantage of Present Value Reduces MSA cost vs Paying 100% Cash Now Rated Age provide DISCOUNT off ANNUITY PRICING vs Standard Annuity Pricing

Example:
Facts Male Age = 30 Rated Age = 52 Normal Life Expancy = 46 years Rated Age Life Expectancy = 24 MSA Cash Funding $4,138.76 per year $190,383.00

1.) Applying Rated Age Reduces # of yrs Medicare requires payments

$4,138.76 per year Normal Life Expectancy 46 yrs x 46 $190,383.00 $4,138.76 per year Rated Age Life Expectancy 24 yrs x 24 99,330.00

SAVINGS ..minus

$91,053.00

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2.) Funding MSA with Annuity Reduces MSA cost to $63,000 vs. $99,330
COST A.) Cash B.) Annuity Cost: $8,278.00 Seed Money +

Payments of $4,138.76 / Yr for Life $63,121.00

$71,399.00 Total Cost Seed Money + Annuity

SAVINGS .

....minus

$19,654.00

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3.) Apply Rated Age to Annuity to Reduce Cost to $53,719 vs $63,000

A.) Cash B.) Annuity Cost: Payments of $4,138.76 / Yr for Life $8,278.00 Seed Money + $53,719.00 $61,997.00 Total Cost Seed Money + Annuity $9,402.00

SAVINGS ..minus

TOTAL SAVINGS USING ANNUITIES AND AGE RATINGS ... .$120,109.00

New Cost to Fund MSA

$70,274.00

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Dispelling the Myth about annuitizing Indemnity

SSDI Limits Combined WC and SSDI Payments to 80% of ACE (Average Current Earnings) SSDI is Taxable (IRC Sec. 86(d)(3)
Tax Liability applies to full SSDI Benefit BEFORE offset

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Example Male 40 yrs old Earning $40,000 80% ACE $2,667 NLE 37.6yrs US Vital Stats Table 2 WC Rate: $2,223.33 month SSDI: $1,256.00 month
Settlement Value Indemnity = $455,984
(PV 5% of $2,223 per month for 37.6yrs)
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Cash Indemnity Settlement $455,984 Equivalent Value of WC settlement SSDI Max payment
$1,010.60 $1,256.00 Total $2,266.60 Under 80% ACE ($2,667) Cash per month for life Total Payout
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Results:

$ 455,984.00 SSDI Pmt $ 1,256.00 $1,022,691.00

Annuity cost Cash Settlement

$ 245,134 $ 54,866 $ 300,000.00

$ 54,866 Cash $ 1,256 Full SSDI Benefits $ 1,411 Annuity Difference $ 2,667 Per Month For Life $ 1,258,216 Total Lifetime Payout
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Results:

The Situation:

Self Insured are interested in resolving, to the greatest extent possible old, long lingering legacy WC liabilities, including claims handling.

The Solution:
Purchase an annuity -as Substitute payer to fully fund your future indemnity payment obligations.
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Traditional Assignment Options Limited to Indemnity Only

For Insurance Companies: Qualified Life Insurance Annuity Reinsurance For Self Insureds: Non Qualified Life Insurance Annuity

Payees look for payment exclusively from Reinsurance Issuer or Non Qualified Annuity Insurer.

For Assumption of Medical: A different solution is needed

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Using Annuities as Substitute Payers

Workers Comp Substitute Payer Regulations

No State Prohibits the use of annuities to fund Work Comp obligations

Most states have no statutes or regulation that speak to the use of an annuity to fund work comp obligations. Only the laws of TX GA NE VA expressly address the use of annuities to fund work comp obligations.

Some states, such as FL., specifically encourage the use of annuities to fund work comp obligations
(XXVII, Chapter 625.091)
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An Annuity Substitute Payer Plan allows for:

A Fully funded indemnity payment obligation Take down reserves Eliminate state reporting Eliminate claims handling expense Reduce your state guarantee fund premium

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Substitute Payer Option for Work Comp Assignments Indemnity Only

WC Claimant
Valuable Consideration & Payment Obligation

Self Insured

Periodic Payment Obligation

Policy to Self Insured Company

Reinsurance Or Non-Qualified Annuity From Life Company

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I receive my checks every 2 weeks. When I have bills I just submit them and they are paid.

Get some immediate cash to pay bills Annuity provide guaranteed benefits for family (under Comp payments stop at death.) Annuities can be tailored to claimants specific needs Annuity Payments dont have to follow the WC Statutes: can be made any way they want. Annuities are Tax Free and paid for a lifetime Ability to choose their own doctors. May Go back to work without jeopardizing benefit

Have a conversation to build rapport Discuss Annuity Options -not offers

Gain Trust and Credibility; not Hostility

Discover REAL Needs Address the wants

Debt / Credit Card balances? Child Support / Alimony? Misc. Items the Insurer Wont Authorize? Future College / Training Goals?

Design Annuity Income, financial Plan for Life!

Match Cash/Periodic Payments with real Needs
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Thank You for attending

For further information contact:

Christopher J. Hathaway, Paul A. Hathaway,

EPS Settlements Group
248.715.5250
phathaway@epssg.com chathaway@epssg.com

MBA

LIC, CSSC