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Present Value of Structured Settlements

by John Darer® CLU ChFC MSSC RSP CLTC

What is present value and how does present value relate to a structured settlement?

The time value of money is how much money is worth if earning a given amount of interest over a given amount of time.

If you invest $100,000 into a 30 Year United States Treasury Bonds at 4.12% and hold them to maturity, in 30 years your portfolio is worth $335,756.77.  As the website Girls Just Wanna Have Funds states: "Compound Interest Is Your Friend:  Make Her Work For You!"   The pot of gold at the end of the rainbow is its future value

If someone wants to buy your property and says they will give you " a big lump sum" of  $335,756.77 in 30 years with no payments today, what is that future sum worth to you today? What is its present value?

The present value is a product of the discount rate used

If you receive $335,756.77 in 30 years and you assume a 4.12% discount rate, all things being equal to the above example for future value, then your present value is $100,000.00.

On the other hand if you had money in hand today and a comparable investment were available on which you could earn 6%, then if discount rate of say 6% were used then the present value would be lower. Conversely if a discount rate of lower than 4.12% were used the present value would be higher.

The above are examples of present value in relation to a lump sum to be received in the future, but you can also easily calculate the present value of an income stream. It might be useful for example, if you were comparing two contract offers for an athlete that included deferred bonuses paid in different amounts at different times.

Time value of money calculations have alot of application in the structured settlement and settlement planning arena.

• A component to determining the economic value of damages
• Valuing a life care plan.
• Performing the analysis required for a CPLR 50A or CPLR 50B judgment in New York to determine interest and attorney fees and everything resulting therefrom, including the cost to fund the judgment.
• Determining the value to assign to structured settlement payments remaining upon the annuitant's death for estate tax purposes
• Determining the value to assign to structured settlement payments remaining upon the annuitant's death to determine the amount to be paid to a surviving payee under a commutation rider.
  
• Comparing structured settlement quotes with different cash flows.
• Determining the factoring discount for a  structured settlement factoring transaction (i.e. you are selling structured settlement payment rights that you own,  or buying them from someone else as an investor.
  

From time to time, consumers, financial writers and even judges inadvertently muddle future value with present value. We're here to help our clients and the judiciary better understand the numbers when time value of money comes into play.

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Last updated October 2, 2023

 

4structures.com, LLC Voted "One of Best" in Connecticut For 3rd Year In A Row

The Connecticut Legal Community has voted 4structures.com, LLC one of the best in a survey conducted by the Connecticut Law Tribune for the 3rd straight year. The annual survey polled readers of the ALM Media publication about structured settlement vendors as well as a variety of different categories. Both the primary and secondary market companies were grouped together in the same category of the survey. 4structures was the top primary market company and the second overall in the category.

What Does Certain and Life Annuity Mean? Annuity 101

by John Darer® CLU ChFC MSSC CeFT®  RSP CLTC

With baby boomers and retirees seeking stable guaranteed income these days and others appreciating it, it's more likely than not that they will at some point consider annuities.

Some annuity terms and phrases like "certain and life"can be confusing and I want to help ease your pain here.

This post is the beginning of a multi-part  Annuity 101 series that will be helpful to anyone considering annuities, whether you are a retiree or getting close to retirement; or you are a personal injury plaintiff or a claimant in a wrongful death action looking at a structured settlement annuity; or a seller of high value low basis property or seller of a business considering a structured installment sale; a plaintiff attorney or law firm who is contemplating structuring legal fees; or a celebrity who is looking to structure endorsement fees.

So what does "certain and life" mean? 

You may encounter annuity proposals which state "X$ per month certain and life" or "X$ per year for life with 30 years certain" or simply "X$ per month for 10 years certain". Simply put the certain period represents the number of years that will be paid whether or not the measuring life survives the entire payment schedule.

A certain period is sometimes mislabeled a guarantee period. While the terms would be synonymous if the annuity were to pay for a fixed period certain, the misnomer comes when the annuity includes a lifetime benefit.

The reason it's a misnomer is fundamental to what an annuity is. An annuity is an insurance contract guaranteed by the full faith and credit of the insurance company that issues it. With a lifetime benefit the benefits  ARE CONTRACTUALLY GUARANTEED.

Even an annuity that has no certain benefit such as a lifetime only annuity is contractually guaranteed.

This misnomer can lead to documentation errors. It is better to use the term "period certain" to describe payments that will be made "come rain or shine" whether living or not.

With all due respect to Ben Franklin, the continued parroting of an 18th Century saying " nothing can be said to be certain except death and taxes",  is inaccurate today because for people who qualify for some structured settlements the only thing certain is death and their annuity payments.

Look for more episodes of our Annuity 101 information series coming soon.

in the meantime, click the following link for more information and explanation of the types of structured settlement payments, or visit the glossary of structured settlement settlement terms,keywords and phrases for settlement planning and financial planning terms at 4structures.com