Let’s say that you want to receive $100,000 per year for 20 years, and that you want the payments to continue to your heirs if you die before the 20 years are up. Although you (or your heirs) will be receiving $2,000,000 over the 20 years, the defendant will be paying much less than $2,000,000 to fund the settlement.
That is because a structured settlement is what is known as a "future income stream." A future income stream generally has to be calculated in terms of its present value. Present value is a financial concept that involves determining the value of a future income stream as if it were all in a bank account today.
In other words, how much money does the insurer need in a bank account, earning interest, today in order to pay you and/or your heirs $100,000 each year for the next 20 years? The quick answer is that the insurer will need substantially less than $2,000,000 in a bank account today in order to pay your structured settlement. But this is a complex financial calculation, and your lawyer will customarily hire an economist to advise him/her on how to calculate the value of the structured settlement.
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