Structured Settlement Calculator

Estimate the present value of a structured settlement payment stream.

Understanding Structured Settlements and Present Value

A structured settlement is a financial arrangement, typically used to resolve a personal injury lawsuit or other claims, where the injured party (the recipient) receives a series of periodic payments over time, rather than a lump sum. These payments are often guaranteed by an annuity purchased by the defendant or their insurer. Structured settlements offer several advantages, including financial security, protection against mismanagement of funds, and tax benefits (in many jurisdictions, payments are tax-free).

However, when comparing different settlement options or when needing immediate funds, it's crucial to understand the present value of these future payments. The present value represents the current worth of a series of future payments, considering the time value of money. In simpler terms, a dollar received today is worth more than a dollar received in the future, due to its potential earning capacity (interest).

How the Structured Settlement Calculator Works

This calculator estimates the present value of a structured settlement based on several key inputs:

• Total Number of Payments: The total count of individual payments the recipient is scheduled to receive.
• Amount Per Payment: The fixed dollar amount of each individual payment.
• Year of First Payment: The calendar year in which the very first payment is scheduled to be made. This is crucial for determining the timing of all subsequent payments.
• Payments Per Year: How frequently payments are made within a 12-month period (e.g., 1 for annual, 12 for monthly).
• Discount Rate (Annual %): This represents the expected rate of return (or interest rate) that could be earned on an investment if a lump sum were received today. It's used to "discount" future payments back to their present-day equivalent. A higher discount rate results in a lower present value.

The Math Behind the Calculation (Net Present Value)

The calculator uses the concept of Net Present Value (NPV) for a series of cash flows. The formula for the present value (PV) of a single future payment (FV) received 'n' periods in the future, with a periodic discount rate 'r', is:

PV = FV / (1 + r)^n

For a structured settlement, we have a series of payments. The calculator calculates the present value of each individual payment and sums them up.

Let:

• P = Payment Amount per period
• N = Total Number of Payments
• Y_first = Year of First Payment
• Y_current = Current Year
• F = Payments Per Year
• DR = Annual Discount Rate (as a decimal, e.g., 5% = 0.05)

First, we determine the effective discount rate per payment period:

r = (1 + DR)^(1/F) – 1

Next, we calculate the total number of periods from today until the last payment. The number of years until the last payment is (Y_last – Y_current), where Y_last is the year of the last payment. The last payment occurs at period N.

The total number of periods 'n' for the k-th payment (where k goes from 1 to N) needs careful calculation based on the year of the first payment and frequency.

A more direct approach for regular payments:

The present value of an ordinary annuity is given by:

PV = P * [1 – (1 + r)^(-N)] / r

However, this formula assumes the first payment is one period from now. Since our first payment might be further out or have a specific start year, we need to adjust. The calculator calculates the PV of each payment individually based on its specific timing relative to the current date.

Let's refine the calculation logic: The number of periods until the first payment is `n_first = (firstPaymentYear – currentYear) * paymentFrequency`. If the first payment is within the current year, `n_first` might need adjustment to represent the actual number of periods until the first payment date. For simplicity in this example, we assume the first payment occurs at the *end* of the first period calculated from the start year.

The total number of periods until the last payment is `n_last = n_first + N – 1`.

The calculator iterates through each payment, calculates the number of periods `n` from the current time until that payment, determines the periodic discount rate `r`, and sums `P / (1 + r)^n` for all payments.

Example Calculation Breakdown: Assume:

• Total Payments (N) = 10
• Payment Amount (P) = $1,000
• First Payment Year (Y_first) = 2025
• Payments Per Year (F) = 1 (Annual)
• Discount Rate (DR) = 5% (0.05)
• Current Year (Y_current) = 2024

1. Calculate the periodic discount rate (r): Since F=1, r = DR = 0.05. 2. Determine the timing of payments: – Payment 1: End of 2025 (1 year from end of 2024) -> 1 period – Payment 2: End of 2026 -> 2 periods – … – Payment 10: End of 2034 -> 10 periods 3. Calculate PV for each payment: – PV₁ = $1000 / (1 + 0.05)^1 – PV₂ = $1000 / (1 + 0.05)^2 – … – PV₁₀ = $1000 / (1 + 0.05)^10 4. Sum all PVs: Total PV = PV₁ + PV₂ + … + PV₁₀ This sum is approximately $7,721.73.

Example with Monthly Payments: Assume:

• Total Payments (N) = 120 (10 years * 12 months)
• Payment Amount (P) = $100
• First Payment Year (Y_first) = 2025
• Payments Per Year (F) = 12 (Monthly)
• Discount Rate (DR) = 5% (0.05)
• Current Year (Y_current) = 2024

1. Calculate the periodic discount rate (r): r = (1 + 0.05)^(1/12) – 1 ≈ 0.004074 2. Determine the timing of payments: Assume the first payment is made at the end of the first month of 2025. – Payment 1: End of Jan 2025 -> ~13 periods from end of 2024 (12 months in 2024 + 1 month in 2025) – Payment 2: End of Feb 2025 -> ~14 periods – … – Payment 120: End of Dec 2034 -> ~131 periods 3. Sum PVs: Total PV = Σ [ $100 / (1 + r)^n ] for n = 13 to 131. This sum is approximately $9,578.68.

Disclaimer: This calculator provides an estimate. Actual present value calculations can be complex and depend on specific contract terms, payment timing conventions, and prevailing market discount rates. Consulting with a financial professional specializing in structured settlements is recommended for accurate valuations.