Time Value of Money- Structured Settlement Factoring
The time value of money in a structured settlement factoring transaction is based upon several key points. When a tort victim agrees to a structured settlement after a personal injury case, the insurance company takes the settlement money and invests it into an annuity that pays part principal and part interest to the annuitant for a given amount of years.
Lets say that the annuitant has a choice of receiving $10,000 today or $10,000 in 3 years. The obvious answer to this example is to take the money now because money is of greater value today. A $5 bill today can do greater things than it will be able to do 3 years from now. Ten years ago a $5 bill could purchase 4 gallons of gas, but now that same $5 bill cannot purchase 2 gallons of gas.
In the simplest form many individuals will choose to have their money now, but other scenarios do not provide such concise decisions. Lets say that the annuitant can take $10,000 now, or take $15,000 in three years. This example is similar to a structured settlement factoring transaction, where the following exists:
$10k= present value= offer by factoring company
$15k= future value= future lump sum money
In the example above the $15,000 option is more valuable due to the interest that would be earned during the 3 years of waiting for the money.
Many times in a structured settlement factoring transaction, a tort victim's need for money outweighs the time value of money equation.
