Quite simply, the definition of the time value money is the value of money, given an amount of interest earned over a period of time. Unfortunately, that definition may not mean too much to you and certainly doesn’t provide an explanation of how much you can expect to receive from selling your structured settlement. However, if you are considering selling all or a portion of a structured settlement, this is a term you need to be very familiar with. The time value of money is a complex term that is the basis for finance. At the core, is the principal that any amount of money is worth more now than the same amount of money in the future. This is due to its future earning potential. Let’s use a simple example to illustrate this term. If someone offered you $100 today or $100 next year, which offer would you accept? Naturally, you would prefer to have the $100 today because now you have the option to spend it immediately or invest it using interest to increase its value to more than $100.
Apply this same logic to selling a structured settlement. Using the time value of money, a potential buyer can determine what a structured settlement is worth due to the concept that a single lump sum or a series of future payments can be converted to an equivalent value today. Another important concept is that money has different values depending on when it’s received. In considering whether or not to sell a structured settlement, you need to understand that you will certainly receive less money than the future value of your settlement. Why? Because the time value of money means money promised in the future is worth less than money in your hands today. Additionally, a portion of the payments you are due to receive in the future is interest and has not yet been earned. When you decide to sell your future payments, you are trading them for money today. Let’s look at an another example. As a recipient of a structured settlement, you will be receiving $800 per month for the next 20 years totally $192,000. However, if you decide to sell that money stream for a lump sum today, you will receive less than $192,000 because tomorrow’s money is worth less than today’s. A potential buyer will need to know the payment amount, number of payments, the interest rate and future value in order to determine the present value of the settlement. Potential buyers will use this information in combination with other factors to determine an offer for your settlement.
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