The Time Value of Money
When someone wins a court case that involves a significant monetary award, that money may be placed in a structured settlement (or annuity) to be paid out in installments over time. While it’s great to have a steady stream of income, it can be hard to wait for those payments to add up when cash is needed right away to pay debts.
The good news is that if you have a structured settlement or were recently awarded one, you can sell all or part of your structured settlement for a lump sum of cash that you will receive now. But choosing whether you want to sell part or all of a settlement requires careful thought.
As you think about selling your structured settlement, an important factor to consider is the time value of money. What is that? In its simplest form, it’s the idea that the value of a dollar today is worth more than a dollar tomorrow due to its potential to earn interest.
Structured settlement buyers know this, of course. It’s one of the reasons why when you are selling structured settlements they will offer you a lump sum for your settlement that is less than the total amount of your payments or annuity. After all, the settlement buyer must wait for the money from a structured settlement to pay out in the future. And future dollars are worth less than a dollar received today.
Thus the time value of money is a key part of the complex formula used to calculate the discount rate for a structured settlement transaction. The discount rate is essentially your cost applied by structured settlement buyers to your future payments to cover the transaction fees for the services and maintain a profit.
Of course, there are times when you need cash immediately to deal with a pressing financial need. If that’s the case, give yourself some time to consider the tradeoffs you are making by selling your settlement. If you still want to proceed, shop around and get quotes from several settlement buyers in order to get the best deal.