What Your Structured Settlement Payments Are Worth

When customers call J.G. Wentworth to inquire about selling some or all of their structured settlement payments, one of the most important questions they want an answer to is what their payments are worth.

For starters, answering what they are not worth might be helpful.  Your structured settlement payments are not worth the number of payments you are getting, times the dollar value of the payments.

The fact is, a payment you are going to receive in the future is worth less than the very same payment received today.  Understanding why this is so is often very difficult.  If you want to leave it at future payments being worth less than present payments, then read no further.  If however, you want to understand the underlying principals then read on.

Basically, payments in the future are worth less than payments today for two reasons:  inflation and interest.  We'll provide an example of each concept to make them clear.

Let's take a look at the impact of inflation – which is the rise of prices over time – first.

For starters, forget about money and think about goods.  Suppose that today you can buy four candy bars for the money you have in your pocket.  Now let's further suppose that prices continue to rise so that after 10 years you can buy just one candy bar for the same amount.  Basically, it takes four candy bars in the future to equal the value of one candy bar today.

Now substitute the word dollar for the words candy bar.   Now it takes four candy bars in the future to equal the value of one candy bar today translates into it takes four dollars in the future to equal the value of one dollar today. What's going on here?  Basically, rising prices means that dollars received in the future can buy less and therefore dollars received in the future are worth less than dollars received today.

Now what about interest?

Consider this:  at prevailing interest rates of say, 3%, $1.00 invested today will be worth $1.03 a year from now.  Another way to say this is that today's value of $1.03 received a year from now is $1.00.  Finance professionals would simply say the present value of a $1.03 one year from now is $1.00.

Now how does this impact your structured settlement payments?  Basically, when someone buys your future payments they have to decide between buying your payments and buying other investments that could pay them interest.  If they paid you $1 today in exchange for the $1 you will receive in a year, they are losing the 3 cents they could have earned by investing it elsewhere.

So how do they avoid losing this 3 cents when buying your settlement payments?  By paying less than a dollar for them.  If someone pays you $0.97 today, and then receives your $1.00 in the future, then they make about same $0.03 that they could have by simply investing a dollar at 3%.

This is why investors pay less for future payments than the dollar amount you will receive in the future:  because they can earn interest elsewhere.

When you put the two factors together, rising prices or inflation and the ability to earn interest, they conspire to make future payments worth less when expressed in terms of their value today.  If this is clear to you now, congratulations, you have mastered one of the more complex concepts in finance.  If you don't quite understand the entire concept, give it some time.  It may take a while, but eventually, the concept will sink in.