The present value of money is defined as the value on a given date of a future amount discounted to reflect the time value of money. Money has a time value because it can be invested to make more money. When considering selling all or a portion of a structured settlement, you must understand several terms that significantly impact the offer a potential buyer will make. The further away the payments are the more difficult it is to determine the present value. Many factors have to be considered such as inflation, interest rates, interest lost, market opportunities, risk and more. So, the further in the future your payment is, the less it is worth today. A potential buyer will take all the factors into consideration and determine a discount value to apply to the payments for sale to reach the present value. The amount of the offer will be determined by the discount value the potential buyers use. We will elaborate further on discount value in the next post.
As an example, let’s say you have been awarded $500,000. According to the terms of the settlement, you will receive $100,000 over the next five years. Let’s further say that each year you will receive the $100,000 in twelve equal installments. You are guaranteed to receive the entire $500,000 if you continue to receive the payments each year for the next five years. Of course the terms of your settlement are probably very different, but hopefully this illustration will help you to understand the present value as it relates to any structured settlement. For argument sake, let’s say that you’re in the second year of the settlement and to date you’ve received eighteen payments. Now let’s say, for any number of reason you begin to consider the option of selling a portion or all of your future payments. Before any potential buyer can make you an offer, they must determine the present value of the future payments you’re considering selling. For simplicity sake, let’s say you decide to sell all the remaining forty two payments of the settlement. A potential buyer is going to take the future value of the payments, for argument sake, let’s say that’s $350,000 over forty two payments. After weighing all the factors, let’s say they have reached a discount rate of 8%. You can easily figure out the present value using any type of financial calculator or one of the numerous ones online. Using this example, our future amount of $350,000 that you will receive over the next forty two months is worth $264,770.22 today. Depending on the company, they can offer you different discount rates. It is incumbent on you to seek the best offer.
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