by John Darer CLU ChFC CSSC RSP
How do you find out the interest rate on a structured settlement? The calculation is easy if you know a structured settlement expert with annuity issuer software or an Excel spreadsheet. But it's the context that is important to be sure that you have the right information.
Consider a couple of possible contexts in which what is being referred to as a "structured settlement interest rate can fall:
A. The Internal Rate of Return (IRR) of a structured settlement is an important financial calculation used in comparing alternative investments. The IRR is the constant rate of interest that would be needed to be applied to a defined deposit to produce defined future cash flows at certain amounts and times. It is especially useful in comparing two or more sets of uneven cash flows.
The IRR can vary by type of structured settlement payment. If there is a period certain annuity, then the IRR is calculated to the end of the certain payment period. If the structured settlement is for a period certain and life thereafter (i.e payments are life contingent after the certain period has ended), then the IRR is typically calculated to normal life expectancy. A structured settlement expert should be able to provide you with IRRs for several different life expectancy scenarios as well as to the end of the certain period so that you can plan accordingly. When evaluating structured settlements with multiple cash flows it may be helpful to have the IRR of each payment stream calculated.
It is important to stress that a structured settlement is not like a bank account. There is no passbook statement or monthly status report. You basically get your payments in the mail, or by the more popular direct deposit, when scheduled. While the interest is implicit, in the annuity, a structured settlement is a contractual guarantee backed by the annuity policy representing the full faith a and credit of a regulated annuity issuer.
Some of the "cheap labor" hired by search engine optimization firms for some cash now pushers have misrepresented that you don't get any interest in a structured settlement. Not true ,unless when you established the structured settlement you agreed to accept less than what you put in. It is possible that you just need to better understand what you have. Such statements ,when they occur, unfortunately show that the makers are either (1) ignorant (2) dishonest or (3) prone to exaggeration.
B. It is important to distinguish between the Internal Rate of Return and the Present Value. With the present value calculation the defined inputs are (1) Future Values (amount and timing of payments) and (2) the discount rate. When it comes to selling structured settlement payment rights there are interest rates used which are referred to as " discount rates" because the buyer must reduce the future payments to be sold to their present value (as opposed to future value). The mandatory disclosures in such transactions, may actually include two rates (1) the statutory discount rate and (2) the effective discount rate. The effective discount rate is the true cost of foregoing the future payments in exchange for a lump sum and is a crtical compariron tool.
To someone who is financially trained much of this stuff is rudimentary however, in a time epriod where cash now pushers increasingly use terms that they puport to overlap between the primary and secondary market for structured settlements it lays a foundation for consumer confusion.
If you need help to determine the rate of return on a structured settlement, or simply need structured settlements quotes please contact us at 888-325-8640