Structured settlements represent a stream of payments, usually extending twenty years into the future. If you sell this stream, you cannot anticipate the buyer to pay you the total of these future payments. In particular, you will get much less, depending on the amounts and years involved. Let us look at how the buyer calculates the amount to pay you.
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What Is a Structured Settlement?
Structured settlements are straightforward. Many civil lawsuits result in an individual or some company paying money to another to right a wrong. Those responsible for the wrong may arrange the settlement on their own, or they may be caused to pay the money when they lose the case in court.
Money Has A Time Value
If you have 10000 dollars in hand now, you could invest it in different manners. If you are a small businessperson, you could use it to enhance your publicity efforts and expand your production capacity. These might result in the 10000 dollars creasing in a year’s time.
Or, if you are a stock investor, you could trade in stocks and presumably make the 10000 dollars grow into at least 12000 dollars by the end of the year.
More modestly, you could invest in interest-paying financial security and earn a 5% interest paid every quarter. That could make the 10000 dollars into 10510 by end of the year using different investment forms.
Another opportunity is to invest the money in a training program that provides you with a vocational skill in high demand. You could thus improve your earning potential and thus earn a return on that investment.
What all the above examples demonstrate is that money in hand now could earn returns and accumulate into a larger sum by a prospective date as structured settlements. This is named the time value of money.
Future Payments Are Discounted
Considering the time value of money, aggregates received on future dates are discounted to compute their “present value”, i.e., value now. This is typically accomplished using the prevailing interest rate in the market. For instance, we found that 10000 dollars invested as structured settlements at 5% interest, paid quarterly, becomes 10510 dollars at the end of one year.
Hence, the current value of 10510 dollars received one year from now is only 10000 dollars. The current value is always based on a rate of interest, and the “interest compounding“ method is utilised. Interest compounding means the commonness with which interest is computed and added to the principal. In our example above, the compounding was done each quarter. Next quarter’s interest would be computed on this interest-additional principal amount.
Also Read: How can I sell a structured settlement payment?
The future payments you receive under structured settlements are discounted in an alike fashion. Each of the payments would be dismissed based on when it is received. Accordingly, the amount you receive now, based on the present values of all the various payments, would be much less than their total.
Use the Cash Well
It is feasible that you are cashing out your structured settlements to meet unavoidable necessities, like paying off a debt or meeting medical expenditures. In such a case, you have no choice but to use the cash to meet these.
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However, if the cash out is for other intents, try to invest it in a course that earns you a good return. For instance, you could invest it in a home, in a suburb where real estate property prices are going up. Or take up a vocational technique that would enhance your employability.
If you already have an honourable income from other sources, you might actually consider taking a vacation to recharge yourself.
Attempt to earn a return that would be higher than the interest you paid for cashing out. (The discounting of structured payments to current value is actually a kind of interest payment.)
Also Read: Do You Pay Yourself?
Select A Buyer Carefully
The buyer of your structured settlements or payments should have certain qualifications.
Firstly, the person (or firm) must be experienced in the occupation. Cashing out structured settlements involves different legal formalities. Unless the buyer is experienced enough to handle all the formalities accurately, you might find yourself in crisis. If a legally binding assignment is not formed, the original payer might refuse to pay your buyer.
Secondly, select a buyer who deals upfront with you, describing what to expect. Otherwise, you might come to have undue expectations and get into disproportionate conflict with the buyer.
Finally, select a corporation that believes in ethical practices. Unethical corporations might tell you one thing and do something else. They might also not give you a fair deal for any of your structured settlements.