Structured settlements represent a stream of payments, often extending twenty years into the future. If you sell this stream, you cannot expect the buyer to pay you the total of these future payments. In fact, you will get much less, depending on the amounts and years involved. Let us look at how the buyer computes the amount to pay you in the following 3 Steps:
1. Money Has A Time Value
If you have 10,000 dollars in hand now, you could invest it in different ways. If you are a small businessperson, you could use it to improve your publicity efforts and expand your production capacity. These might result in the 10,000 dollars doubling in a year’s time.
Or, if you are a stock investor, you could trade in stocks and probably make the 10000 dollars grow into at least 12000 dollars by the end of the year.
More modestly, you could invest in an interest-paying security and earn a 5% interest paid every quarter. That could make the 10000 dollars into 10510 by end of the year.
Another possibility is to invest the money in a training program that provides you with a vocational skill in high demand. You could thus enhance your earning potential and thus earn a return on that investment.
What all the above examples indicate is that money in hand now could earn returns and accumulate into a larger sum by a future date. This is called time value of money.