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Structured Settlement Concepts – Time Value of Money

If someone gave you the choice of receiving $1 million now, or $1 million one year from now, which would you choose?

Most people would choose to get $1 million now.

That, in essence, is the time value of money.  It’s realizing that $1 million dollars now, even though the amount does not change one year from now, is NOT the same as having $1 million dollars a year from now. 

Lots can happen within a year, so why would you wait to get your money?

More importantly, if you have the $1 million now, you have the freedom to do whatever you want with it.  Specifically, you can invest it now – and let that money earn even more money for you.

That is the basic concept at the heart of selling a structured settlement.  The person who has a structured settlement doesn’t want to wait.  He wants the ability to do whatever he wants with his money now.  He may want to invest it.  It sounds perfectly logical.  The old adage “time is money” absolutely applies.  Money you have in hand now is more meaningful to you than what you’ll receive in the future.

Many companies that are in the business of buying structured settlements like to refer to the “time value of money” argument to persuade you to sell.  Why wait, when you can get – and invest – your money now?  This sounds great, but you should also consider the amount they are planning to give you for your settlement.

All buyers of structured settlements give an amount in lump sum that is less than you would have received over time.  The buyer figures out this lump sum amount by applying a discount rate to your settlement.  That means, the buyer takes the total amount of the payments he is buying, and works backward to determine the interest earnings and profit percentage he wishes to earn, in order to figure out what he is willing to give you.  This is called the discount rate.

So – what is this discount rate?  If the prospective buyer doesn’t tell you outright, there are plenty of online calculators you can use to plug in the terms of the proposed deal and figure out what percentage the buyer is using to discount your deal.  Often, this discount rate is in the double digits – the buyer is in business to cover his costs and make a profit, after all.  Besides, he is also taking on the waiting by giving you your money now.  But if this discount rate is higher than returns you could get elsewhere, and you don’t have some other compelling reason to sell your settlement, consider that you might do better investing the money on your own.

If you need help selling your structured settlement, annuity or lottery payments,
contact us today. We are here to answer your questions and help you obtain the
highest possible price for your payments.

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