What Is a Structured Settlement?
A structured settlement is a financial arrangement in which a claimant — typically someone who won a personal injury lawsuit, workers' compensation case, or other legal claim — receives compensation as a series of scheduled payments rather than a single lump sum. These payments are made over a defined period, often spanning years or even decades, and are usually tax-free under U.S. federal law.
Structured settlements are common outcomes in cases involving:
- **Personal injury lawsuits** (car accidents, slip-and-fall, medical malpractice) - **Workers' compensation claims** for long-term disability - **Wrongful death settlements** providing ongoing support to surviving family members - **Product liability cases** requiring lifetime medical payment streams
While a structured settlement provides financial security and a guaranteed income stream, many recipients find themselves in situations where they need a larger amount of money upfront — for a home purchase, medical emergency, debt payoff, or investment opportunity. In those cases, understanding the present value of the settlement is essential.
How Present Value Is Calculated
The present value (PV) of a structured settlement is calculated using the standard **present value of an ordinary annuity** formula:
\`\`\` PV = PMT × [1 - (1 + r/n)^(-n×t)] / (r/n) \`\`\`
Where: - **PMT** = payment amount per period - **r** = annual discount rate (as a decimal, e.g. 0.10 for 10%) - **n** = number of payment periods per year (12 for monthly, 4 for quarterly, 2 for semi-annual, 1 for annual) - **t** = number of years remaining
The discount rate is the key driver of present value. It represents the rate of return that could be earned if the money were invested today. A higher discount rate results in a lower present value — meaning future payments are worth less in today's dollars.
**Example:** A \$1,000/month payment stream over 20 years at a 5% discount rate has a present value of approximately \$150,977. At a 12% discount rate, that same stream is worth only about \$90,820 — a difference of over \$60,000.
Who Uses This Calculator
This calculator is useful for several groups:
- **Settlement recipients** who want to understand what their payment stream is truly worth before approaching a factoring company or making financial decisions. - **Attorneys and paralegals** assisting clients in evaluating settlement structures during negotiations. - **Financial advisors and planners** working with clients who hold structured settlements as part of a broader portfolio. - **Factoring companies** and structured settlement purchasers who need to quickly assess the value of a proposed purchase. - **Investors** evaluating annuity products, pension streams, or other fixed-income payment arrangements.
Understanding present value helps you negotiate from a position of knowledge — whether you're selling your payments, refinancing, or simply planning your financial future.
How to Use This Calculator
1. **Enter the payment amount** — The dollar amount you receive each payment period (e.g. \$1,500 per month). 2. **Select the payment frequency** — Choose monthly, quarterly, semi-annual, or annual to match your settlement schedule. 3. **Enter years remaining** — The total number of years left in your settlement (1–50). 4. **Enter the discount rate** — The annual interest rate used to discount future payments. Use your personal investment rate for a personal valuation, or use the rate offered by a factoring company to understand their pricing. 5. **Click "Calculate Present Value"** — Instantly see the lump-sum present value, total undiscounted payments, discount amount, and a year-by-year breakdown.
Understanding the Discount Rate
The discount rate is the most important variable in present value calculations. Here is how to think about it:
- **Personal discount rate** (3–6%): If you could invest your money at roughly the risk-free rate (similar to U.S. Treasury bonds or a high-yield savings account), use a rate in this range to understand your settlement's "fair" value. - **Factoring company rates** (9–18%): Structured settlement factoring companies typically apply discount rates in this range when purchasing your payments. This is how they make a profit. A 15% discount rate on a \$1,000/month stream over 20 years results in a present value roughly 40–50% below the total undiscounted payment amount. - **Opportunity cost rate** (varies): If you have a specific investment opportunity or debt with a known return/interest rate, use that rate to determine whether selling makes financial sense.
The higher the discount rate, the lower the present value — and the worse the deal for the seller. Always compare offers from multiple companies, and consider independent legal and financial advice before selling structured settlement payments.
FAQs
Q: What is the difference between present value and face value of a structured settlement? A: The face value (or total undiscounted value) is simply the sum of all future payments — for example, \$1,000/month for 20 years equals \$240,000 face value. The present value is what those future payments are worth in today's dollars, accounting for the time value of money. Present value is always lower than face value when the discount rate is greater than zero.
Q: Can I sell my structured settlement payments? A: Yes, in most U.S. states you can sell some or all of your structured settlement payments to a factoring company through a process called a "factored structured settlement transfer." Court approval is typically required. Use this calculator to understand the present value before accepting any offer.
Q: What discount rate do factoring companies use? A: Factoring companies typically apply discount rates between 9% and 18%, though rates outside this range are possible. Always ask any company you work with to disclose their discount rate explicitly — this calculator lets you see exactly what that rate means for your payout.
Q: Is the lump sum I receive from selling my settlement taxable? A: Generally, if your original structured settlement payments were tax-free (as most personal injury settlements are), the lump sum you receive from selling those payments is also tax-free under the Periodic Payment Settlement Act. However, tax rules are complex. Consult a tax professional for advice specific to your situation.
Q: What is the best discount rate to use for personal financial planning? A: For a conservative, personal-planning estimate of your settlement's worth, use a rate close to what you could safely earn on a low-risk investment — typically 3–6% for U.S. investors in 2025. This gives you a realistic sense of what the payments are worth compared to a lump sum you could invest yourself.
Q: Does this calculator handle variable payment amounts or lump-sum additions? A: This calculator is designed for uniform periodic payments (same amount each period). If your settlement includes variable amounts, step-ups, or lump-sum additions at specific dates, a more advanced spreadsheet model or professional appraisal may be needed.
Q: How accurate is this calculator? A: This calculator uses the standard actuarial present value of an ordinary annuity formula, which is the same formula used by financial professionals and factoring companies. Results are mathematically precise given your inputs. However, they reflect a simplified model — consult a financial advisor for decisions involving large sums.
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