PROTECTING YOUR FUTURE

PROTECTING YOUR FUTURE Structured Settlements m A Guide Now you re sure.

TABLE OF CONTENTS m M CKELLAR S TRUCTURED S ETTLEMENTS I NC. 2007, REVISED EDITION, 2010 - ALL RIGHTS RESERVED. Introduction What Is A Lump-Sum Settlement? What Is A Structured Settlement? Why Should I Choose A Structure? Unlimited Flexibility 04 McKellar Charges No Fees - Ever! 05 No Income Tax - Ever! 05 Financial Protection For You 06 Financial Protection For Minors 06 Inflation Protection 07 Estate Protection 08 More Income With Impairment Ratings 09 Structures Offer Unparalleled Security Frequently Asked Questions: What Is The Structure Interest Rate? 12 Comparison Of Conventional Investment vs. Structure 13 Why Are Structures Tax Free? 14 Can No-Fault Benefits Be Structured? 15 Why Should The Casualty Insurer Allow Me To Structure? 16 Do I Have To Structure My Entire Settlement? 17 Can I Take A Lump Sum And Buy A Structure Myself? 17 Why Should I Choose McKellar? 18 What If I Decide To Structure? 20 Now, It s All Up To You Key Structure Terms Call A McKellar Representative 01 02 03 04 10 12 22 24 28

INTRODUCTION Being involved in settlement discussions about your personal injury claim brings some important choices. Your decisions will affect your future and that of your family. One issue is the choice between a lump-sum payment and a structured settlement (also known as a "structure"). We have designed this guide to help you understand the advantages of the structured settlement option. questions? Call us toll free anytime at 1-800-265-8381 or contact us on the Internet at www.mckellar.com 01

WHAT IS A Lump-Sum Settlement? m A lump-sum settlement is a one-time, cash payment to compensate you for the injuries and losses you incurred as a result of your personal injury claim. Once you receive this payment, you invest it yourself in the way you want, to produce the funds you need. Since the settlement compensates you for personal injuries, Canada Revenue Agency 1 (CRA) does not consider it taxable. However, you do pay tax on any earnings from the money once it is invested. 1 Formerly Canada Customs and Revenue Agency. 02

WHAT IS A Structured Settlement? Unlike a lump-sum settlement, a structured settlement pays your settlement money over a period of time that you choose, instead of all at once. In fact, it is like an annuity (a stream of payments) with almost unlimited possibilities as to its form. A structured settlement is a unique opportunity which is only available to people who have personal injury claims. Where does a structure come from? It is created when a casualty insurer purchases an annuity from a federally-registered Canadian life insurer. This life insurer guarantees to provide you with periodic payments for a specific period or for the rest of your life you get to choose. The payments you receive consist partly of settlement money and partly of interest on the settlement money. They are paid by the life insurer and received by you as tax-free payments of damages. You decide what you need, how much, and when the choice is yours. important! Once you determine the form and your structure is in place, it cannot be changed or cashed in. 03

WHY Should I Choose A Structure? (1. Unlimited Flexibility m Your structured settlement can take whatever form you choose. We work with you to select the features best suited to your needs and create a customized plan: a) Duration and Frequency of Payments You can arrange for payments to last for a fixed number of years (such as 25 years) or for your lifetime (no matter how long you live). You decide whether to receive your payments monthly, quarterly, twice a year, or annually. b) Start Date Payments can begin immediately, or some time in the future (a deferral ). If you need some income now, but more in the future, you can start small and have payments increase after a time. Any deferral allows interest to grow tax free in order to provide higher payments later. c) Periodic Lump Sum Amounts You can arrange to receive lump-sum payments in the amounts and on the dates of your choice. 04

(2. McKellar Charges No Fees - Ever! You will never see a bill or pay investment management expenses when you consult us or have us implement your structure. As a commissioned broker, we only receive payment from the life insurer when the structure is purchased. As a result, the income you see in your Final Printout is the income you will get it s guaranteed. m (3. No Income Tax - Ever! You never pay tax on structure payments. Canada Revenue Agency does not consider them income. Structure payments received by your estate or by your heirs are also received tax free. A lump-sum settlement is also tax free when you receive it but any interest it then earns will be taxable. Every year, the overall return on your investment income is reduced by the income tax you must pay. 05

(4. Financial Protection For You m (5. Your structure makes it possible to have guaranteed income that never runs out. If you design your structure to provide lifetime payments, your tax-free income will be paid for as long as you are alive, no matter what the markets do. (With a lump-sum settlement, if your investment income is less than you need, you will have to cover the shortfall. Inadequate returns and unforeseen withdrawals can exhaust your funds.) Financial Protection For Minors If the settlement is for a child under the age of majority (a minor ), the usual alternative to a structure is to have the funds placed on deposit with the Court. All of the money then becomes available when the child attains the age of majority. If you fear your 18 or 19-year-old may lack the financial maturity to handle such a lump sum, structuring offers an effective solution. Structured settlement payments can provide some funds at the age of majority and spread the rest over a period you determine. This can provide money for your child s education or to supplement lower earnings during his or her early years in the workforce. 06

(6. Inflation Protection You can arrange for your guaranteed structure income to increase each year, either by a fixed amount (such as 2% or 3% per year, compounded), or in accordance with Statistics Canada s Consumer Price Index. The Consumer Price Index (CPI) is a measure of inflation and tracks the change in price each year of an average Canadian basket of goods. With a CPI-indexed structure, your payments will not be capped during periods of high inflation, and they will not decrease if Canada experiences deflation. Indexation helps protect your spending power for as long as your structured settlement is in effect. The costs of goods and services (rent, groceries, medical equipment, rehabilitation services, or attendant care) do increase over time. Structures can provide guaranteed payment increases to help protect against rising costs. 07

(7. Estate Protection If negotiated as part of your settlement, your structure can include a guarantee period to protect your estate. In other words, you may specify the minimum number of payments to be made, whether you are alive or not. For example, a structure can provide lifetime income with a 25 year guarantee period. You receive payments for as long as you live, no matter how long that is. If you die before 25 years of payments have been made, your estate or heirs receive the remaining guaranteed payments tax free. With funds invested from a conventional lump-sum settlement however, your beneficiaries may have to pay tax on capital gains upon your death. To provide such protection, you can include a reasonable guarantee period in your structure at a relatively small cost. It s good to know that your family will have a tax-free guaranteed income if you die prematurely. 08

(8. More Income With Impairment Ratings On Lifetime Structures One of the exclusive features of a lifetime structure is its ability to provide more income over your lifetime, if the life insurer thinks you may have a reduced life expectancy. This involves the use of impairment ratings obtained from life insurers based on existing medical reports (no additional medical exam is required). An impairment rating means that the insurer is willing to treat you as being older than you actually are when providing a quotation for a lifetime structure. This produces more income. Receiving an impairment rating does not mean you will die early. It means only that the life insurer is willing to treat you more favourably for lifetime quotations. When you outlive expert predictions, your structure continues to provide guaranteed tax-free income. important! No other investment allows you to earn more income because of your medical condition. 09

STRUCTURES m Offer Unparalleled Security m The structured settlement is one of the most secure, guaranteed investments available to you. In fact, your structure contains three levels of guarantee: Your 1st Level of Guarantee The Issuing Life Insurer At McKellar, we place your structured settlement with only those Canadian life insurers which offer the greatest long-term security. 1. The life insurer must have an unblemished record of always paying 100% of its obligations on time. 2. The life insurer must be a Canadian federally-registered insurer. Such insurers are overseen by the Office of the Superintendent of Financial Institutions (OSFI). One of OSFI s key roles is to ensure these companies remain strong and financially solvent. 3. The life insurer must issue Investment Grade annuities. Investment Grade is defined for this purpose as a rating of BBB or above from Standard & Poor's. 4. The life insurer must have a high MCCSR (significantly more assets than liabilities). Because of the degree of security offered by these life insurers, the chance of a default is virtually zero. Nevertheless, there are two additional levels of protection. 10 05

Your 2nd Level of Guarantee Assuris Assuris is a not for profit organization that protects Canadian policyholders in the event that their life insurance company should become insolvent. Supported and run by the Canadian life insurance industry, Assuris guarantees 85% of promised benefits (no matter how high), or $2,000 per month, whichever is greater. This means that the entire life insurance industry in Canada is protecting your investment. Your 3rd Level of Guarantee The Owner of the Annuity You are not the owner of your structured settlement annuity. For Canada Revenue Agency to approve your structured settlement, an insurer must remain 100% liable for your payments if the life insurer cannot make them and if Assuris coverage is insufficient. Sometimes this insurer will be the funding casualty insurer. Other times, (if assigned) it will be a separate insurance company. important! The chances of a life insurer which meets our criteria defaulting are exceedingly remote. Still, it is reassuring to know that additional layers of protection exist. 11

FREQUENTLY ASKED Questions (1. What Is The Structure Interest Rate? m The yield of each structure depends on its form and on the frequency of payments. Because it is considered a safe, long-term investment, a structured settlement pays an interest rate like that of any other safe investment, such as a Government of Canada bond. The important difference is that the interest from a structure is tax free. To match the tax-free yield of a structured settlement, you would have to earn a much higher interest rate from another investment. For example, if you are in a 35% tax bracket, you would have to earn roughly 7.7 % interest on a taxable investment to equal a 5% interest rate in a structure.* *See chart on page 13 12

Comparison Of Conventional Investment vs. Structure After Taxes CONVENTIONAL Before-Tax Rate TAX INTEREST CONVENTIONAL STRUCTURED NEEDED TO EQUAL RATE RATE INVESTMENT SETTLEMENT STRUCTURE YIELD 25% 7.00% 5.25% 7.00% 9.33% 6.00% 4.50% 6.00% 8.00% 5.00% 3.75% 5.00% 6.66% 4.00% 3.00% 4.00% 5.33% 35% 7.00% 4.55% 7.00% 10.77% 6.00% 3.90% 6.00% 9.23% 5.00% 3.25% 5.00% 7.69% 4.00% 2.60% 4.00% 6.15% 45% 7.00% 3.85% 7.00% 12.73% 6.00% 3.30% 6.00% 10.91% 5.00% 2.75% 5.00% 9.09% 4.00% 2.20% 4.00% 7.27% McKELLAR STRUCTURED SETTLEMENTS INC. 13

(2. Why Are Structures Tax Free? Your structure payments are tax free because Canada Revenue Agency considers each individual payment to be compensation for personal injury damages. The same is true of a lump-sum settlement. In fact, the government views structured settlement payments as simply an alternative to the lump-sum settlement. Canada Revenue Agency Interpretation Bulletin IT-365R2, issued on May 8, 1987, sets out the requirements for tax-free structure payments. At McKellar, we ensure that every one of these requirements is met. We then confirm this to you in our written corporate Guarantee. 14

(3. Can No-Fault Benefits* Be Structured? Absolutely. Canada Revenue Agency has confirmed that structured settlements can be used to resolve Statutory Accident Benefits claims (No-Fault claims). The No-Fault payments you receive are tax free. If you settle your No-Fault claim with a structure, you will continue to receive tax-free payments. If you settle your No-Fault claim with a lump sum, you are essentially trading tax-free payments for taxable income as soon as you invest the cash. Without settlement No-Fault benefits stop immediately upon your death. The insurer has no obligation to make any more payments once you die. On the other hand, your structure may be negotiated to include a guarantee period to provide continued payments to your family if you die prematurely. With a structured settlement of your No-Fault payments, your entitlement to these benefits is no longer an issue. You have the security of knowing that your structure payments are guaranteed and will be received on time. You can even have your payments deposited directly into your bank account. *Not applicable in all provinces. 15

(4. Why Should The Casualty Insurer Allow Me To Structure? With a structure, less means more. Because the payments are tax free, your structured settlement can save the casualty insurer money, yet still give you more income. This is what makes a structure a win-win solution for everyone. With a structure, both you and the insurer can be confident that you will not run out of money to provide for your income, medical or care requirements. On No-Fault claims, your insurer saves on administrative costs by being able to close its file and avoid the expense of ongoing file handling. 16

(5. Do I Have To Structure My Entire Settlement? No. In fact, we often recommend that people keep some cash on hand, to pay legal fees, to eliminate debt (such as a mortgage or credit card bills), and to set up a rainy day fund for unexpected expenses. This gives you the best of both worlds - easy access to cash and the security of guaranteed structure payments. (6. Can I Take A Lump Sum And Buy A Structure Myself? No. You cannot purchase a structured settlement without the consent of the casualty insurer involved in your claim. This consent is essential. Canada Revenue Agency requires that an insurer own the structure in order for you to receive your payments tax free. Of course, you can purchase a taxable annuity with a lump-sum settlement, but there is much less flexibility in its design. More importantly, you will be obliged to pay tax on the interest it generates. 17

( 7. Why Should I Choose McKellar? m When you choose McKellar Structured Settlements, you are enlisting the services of the largest and most comprehensive structured settlement firm in Canada. McKellar will provide you with access to the expertise you require, from the most qualified legal and insurance professionals in the industry. Our team of specialists includes former injury lawyers as well as former senior claims managers and adjusters. At the time of funding, our Brokerage Department will obtain the highest yield possible, under the terms of the settlement. At the same time, our Legal Department will examine the settlement documentation to ensure compliance with all tax requirements for tax-free status. 18

If you structure with McKellar, our Client Services Department will remain available for the entire life of your structured settlement to assist you, in any regard, as it relates to your structure. To satisfy government standards and to maintain the tax-free status of your payments, you need advice. At McKellar, structured settlements are our only business. We strive to ensure that your settlement meets your specific needs, while complying with all government regulations. We guarantee it. 19

(8. What If I Decide To Structure? Here are the steps McKellar will guide you through, leading to the best possible structured settlement. 1. First, a McKellar structure specialist meets with you and/or your lawyer to discuss your requirements in depth and provide you with several different structure options. We help you to determine your needs and apply the available funds to customize a structure that meets these needs. 2. Once you choose the form of your structure, we request the structure funding. 3. As soon as funding is received at our office, our Brokerage Department shops the market for the best rates from the most secure life insurers. We then place funds with the insurer(s) offering the best quotation(s). This placement of funds locks in rates and your structure begins earning tax-free interest. At this time, we issue our Final Printout, which outlines the income you are guaranteed to receive. 20

4. Our Legal Department reviews all documentation to guarantee compliance with Canada Revenue Agency requirements. 5. We prepare the structured settlement application ourselves to ensure accuracy, and each annuity contract is thoroughly checked by our specialists before we send our reporting letter. We include our written corporate Guarantee, which certifies that your structured settlement payments will be received tax free. 6. For the duration of your structure, you can count on us for customer service. Whatever your future questions or requirements, our Client Services Department is there to help. You can check income amounts or make bank and address changes simply by calling our toll-free number: 1-800-265-8381 or by visiting our website: www.mckellar.com With McKellar, you always receive prompt and personal service and always without charge. 21

NOW, It s All Up To You... m The thought of receiving a large sum of money, while attractive, can also be frightening and confusing. You must keep in mind that most of your settlement funds are intended to compensate you for lost earnings and/or pay for medical, rehabilitation, or attendant care requirements. If you choose to take a lump sum, can you be sure you can find a guaranteed, risk-free investment that provides the secure, ongoing income you need? Free of tax? The structured settlement is just such an investment. You do not have the worry of how to invest and manage a large lump sum. Instead, it is invested on your behalf, in the format you choose, to provide secure, tax-free income for as long as you want. Structured settlements are all about safety and security. They provide you and your family with the peace of mind of knowing that every tax-free structure payment will be made. You can sleep at night knowing your money is safe! 22

There may be conventional investments that offer potentially higher returns, but these are taxable. Carefully weigh the risk you are willing to accept in exchange for a financial return which might be significant, but which is never guaranteed. Please call your lawyer or us for more information. We are happy to meet with you at your convenience at absolutely no cost or obligation. important! Remember Canada Revenue Agency only grants you this one-time opportunity to take advantage of the benefits of a structured settlement. Please take the time to weight the advantages and implications of your settlements options. Now you re sure. 1-800-265-8381 www.mckellar.com 23

KEY Structure Terms m LIFE ANNUITY An annuity which pays for the lifetime of the person receiving payments. TERM CERTAIN ANNUITY Pays for a set period of time, after which payments stop. All payments are guaranteed to be made, even if the recipient dies before the end of the fixed term. TEMPORARY LIFE ANNUITY Stops paying on the earlier of death or after a set number of years. This option may or may not contain a guarantee period. JOINT AND LAST SURVIVOR ANNUITY Payments are based on the lives of two or more people. Payments will continue as long as any one of them is alive. Once the first person dies, payments to the survivor(s) may stay at the same amount or be reduced, depending upon the terms of the contract. 24

IMMEDIATE ANNUITY An annuity which begins to make periodic payments within one year of money being placed with a life insurer. It usually starts in 30 days and pays monthly. DEFERRED ANNUITY An annuity which begins making payments at a fixed future date. This form is useful where money for specific requirements will be needed at a future date. MINIMUM GUARANTEE PERIOD Applies to life annuities, and provides a time period during which payments will be made regardless of whether the recipient is alive or not. It is designed to provide benefits to the estate of the injured party in most cases, or to the casualty insurer in others. REVERSIONARY INTEREST Negotiated most often as part of an Accident Benefits settlement (and occasionally in tort), a reversionary interest designates the casualty company as the beneficiary of any remaining guaranteed structured settlement payments in the event of the structure recipient s death. In the case of a reversion, the estate would not receive any payments after the death of the structure recipient. 25

KEY Structure Terms (continued) m INDEXED PAYMENTS Payments which increase at either a fixed rate, or at a variable rate tied to the Consumer Price Index (CPI). The purpose of indexing is to provide protection against increasing costs in the future. LUMP-SUM PAYMENTS Single payments, at specific future dates. This feature is used to provide large sums for specific needs such as replacement of vans or electric wheelchairs. These are usually combined with monthly payments. SECONDARY PAYEE(S) A person (or people) designated by the structure recipient who, in the event of the structure recipient s death, receives all of the remaining guaranteed structured settlement payments. If no secondary payee is specified, any remaining guaranteed payments after the death of the structured settlement recipient would flow to the structure recipient s Estate, tax free. 26

IMPAIRMENT RATING Recognition that a person may have a life expectancy that is shorter than normal for a person their age and sex. This increases the income on a life annuity or reduces the cost required to provide specific lifetime payments. ASSIGNMENT Assignment occurs when the defendant or casualty insurer providing the settlement money cannot or will not own your structure. Should this happen, a separate insurer will step in to own your structure, which allows you to receive your payments tax free. This process releases the casualty insurer from the ongoing liability for the structure payments, because this liability is taken on by the new insurer. You still require the consent of the casualty insurer to have a structure. 27

CALL A McKellar Representative m Central Canada (Head Office) 649 Scottsdale Drive, Suite 100, Guelph, Ontario, Canada N1G 4T7 1-800-265-8381 Guelph 519-836-1672 Fax 519-836-7631 USA 1-800-265-2789 Western Canada 1-800-265-8381 Edmonton 780-420-0897 Fax 780-425-5917 Atlantic Canada 1-800-565-0695 Halifax 902-423-0135 Fax 902-422-1737 www.mckellar.com 28 D ESIGN: www.riordondesign.com

V.5, 2011 Now you re sure. 1-800-265-8381 www.mckellar.com