by Structured Settlement Watchdog
"A. You work for a company that offers structured settlements to customers. A structured settlement simply pays people a lump sum today in exchange for a stream of regular payments. Suppose Bucky was injured in an accident and settled with the defendant for an annual payment of $10,000 paid at the beginning of each of the next twenty years. Bucky has already received three of the payments, including the most recent, which was yesterday. So, he has seventeen more to go, each payable at the end of each of the next seventeen years. What would be the maximum you are willing to pay Bucky if you can borrow money at 8% APR?
B. Let’s go with Bucky again. Actually, the settlement was for $10,000 each year for the rest of his life. Bucky’s only fifteen, and you expect hat he’ll live for another seventy years. The settlement was signed yesterday, and the first payment will be made tomorrow. How much are you willing to pay him for a structured settlement if you can borrow money at 8% APR?
C. Actually, I made a mistake with Bucky’s settlement. He is to be paid $1,000 per month for the rest of his life. How much are you willing to pay him as a structured settlement if the same facts listed in question #5 still prevail?"
Why Makes the Bucky case Bucky Sucky?
- If you work for a company that offers structured settlements to customers. don't you think you would know what a structured settlement is?
- The statement "a structured settlement simply pays people a lump sum today in exchange for a stream of regular payments" is simply wrong.
- Chegg is totally discombobulated on the definition of structured settlements. There's this thing called "Google" and on it any wonk working for Chegg can Google "what is a structured settlement" and come up with the right definition. So why misinform students Chegg?
- Even if we re-frame Chegg's question so it makes sense as "what a structured settlement factoring company would pay/offer in exchange for the transfer of life contingent structured settlement payment rights", the question Questions B and C reduce the decision about what to offer to a present value calculation. No consideration has been made for whether or not there is a guarantee or certain period. To the extent any payments are life contingent, they have more risk. The real world answer would fundamentally depend on whether the transaction is hedged or unhedged. That is to say whether a life insurance policy is able to be purchased to mitigate the risk of premature death of the measuring life. There would likely be a difference in the amount offered depending on whether or not the deal was hedged.
* accessed September 23, 2021. Reproduced for critical commentary.