It’s important to understand structured settlement factoring principles if you are you are somehow involved in this industry.
No matter if you have a structured settlement that you want to sell, or you are looking at the possibilities of investing in annuities, you need to understand something called the “Time Value of Money” to appreciate how these transactions are processed.
The concept behind the Time Value of Money is that it is much better to have something now rather than something later on, much the same as many people feel about structured settlement annuities.
$100 in your hand now is better than having it two years down the line – it’s worth more to you if you have the money now as it means you can spend it right now if you want.
If you wanted to, you could also invest that $100 right now and try to make it grow for you, so in two years it could be worth a whole lot more.
Economists use a term called “Present Value” when referring to money you have now, and this is essential to understanding structured settlement factoring.
It’s a very simple concept to understand; let’s look again at that $100 that we have now. The Present Value of this money is simply its value right now.
No matter if you keep it, spend it or invest it, it’s still worth the same amount right now – precisely $100.
Now let’s look at another term briefly, something called “Future Value”. The Future Value of that $100 is not going to be the same as its Present Value due to one small thing – inflation.
Your $100 is going to be worth less in two years time than it is today because inflation is constantly increasing, and this means that the value of one dollar is always becoming less and less.
Relationship with structured settlement factoring
When companies and investors look into buying structured settlement money, they will consider the time value of money very carefully before making a quote on any annuity on the market.
They will consider the future payments five, ten or fifteen years down the line, and they will value these lower than what they would be worth if the money could be accessed right now.
What this means is that if the annual payments of an annuity total $10,000 a year, the future value of these annual payments will be less than $10,000.
The company will calculate the future value according to a complex system that estimates future inflation, interest rates etc, before determining the value of these payouts.
In conclusion then, we can see quite clearly that if an annuity holder decides to sell, they are going to lose money on the deal.
Structured settlement factoring means that any potential buyer will need to take into account inflation as well as their own profits before coming up with a quote.
The end result is that structured settlements often sell for around 20% to 30% less than what their value on paper is.
Armed with this knowledge, you need to consider very carefully if selling your structured settlement annuity is the right thing to do.