As called for in a structured settlement, individuals are designated to receive future payments. The payments are issued via an annuity purchased from a large, relatively safe insurance company. Recipients of structured settlement payments sometimes decide that there is an important need to receive settlement funds before the scheduled payment dates. This can be done pursuant to an assignment process that is regulated by the law. At some point in that process, the seller must agree to a price.
What then is a reasonable price for money scheduled to be paid in the future? How does the "market" determine that price? An informed seller can feel protected if they understand two things: 1) The method used to determine the Present Value of a future payment, and 2) The absolute need to confirm that the competitive marketplace has played a role in determining that Present Value.
The Present Value is based on a mathematical discounting process taking into account the amount of time between now and when future money is due. A payment is therefore "discounted" from its future full value back to its Present Value using a discount rate plus the passage of time. A financial calculator, easily found online, will determine the Present Value of any future dollar amount. The calculation requires input of the future value (the amount(s) scheduled to be paid under the settlement), the date that you are scheduled to receive the payment(s) being sold, and the discount rate (interest rate) being charged. Anyone with a mortgage payment, or a car payment, already understands the concept (whether they know it or not). The Present Value of a series of car payments was the price paid for the car (minus any down payment). It is a given that the total of the car payments is more than the amount financed, due to an interest charge. In the same way, the future settlement/annuity payments will be more than a seller receives today due to the discount/interest charge used by the purchaser to create the Present Value. The Present Value is the price received for the future payments.
It is very important for the seller to make sure that the market, made up of all interested purchasers, provide the lowest possible interest charge. Competition takes care of that, as it does for the sale of anything. Summary: Sellers of structured settlement payments can feel comfortable that the sales process is regulated by the law, but the individual seller is fully responsible for forcing the market to work in his or her favor.
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Article Added on Tuesday, August 7, 2012
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Source: http://www.bharatbhasha.net/finance-and-business.php/383269
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