Studies have revealed that a number of people prefer to cash in on their future payments rather than wait for monthly installments. This growing trend is attributed to two major factors. Firstly future payment owners may need a lump sum to fund immediate needs. Others have gone a step further by determining the present value of future payments. People consider that immediate realization of cash from future payments compensates the diminishing effects of inflation on the present value of a future payment.
In simple terms, present value of future payments refers to their actual worth today. At times the present value of future payments tends to be notably higher than the expected value of future payments. The concept of future payments is simple to understand. Insurance or liable companies pay a monthly payment to the bearer. The payments made are actually realized from interests earned through annuities by these companies.
In most cases, these future payments are purchased for a lesser value than the actual settlement amount by paying companies. People therefore are actually receiving a discounted percentage of the settlement over a period of time. In due course of time these equal monthly payments will be of a diminished value. There are many variables involved.
If a person decides to cash in on future payments, the present value of future payments is based on a few factors. These include rating of the insurance company making future payments, the amount that is still payable, period for which future payments are structured and the amount the buying company will deduct for its service charge. Present value of future payments is greater than, when structured over a period of time.
Payments that are due are basically interest that has not been earned yet. When a case is settled, at times the insurance company invests the settlement amount in an annuity. This funds monthly payments, which is a combination of principal and interest. It is for this present value factor that insurance companies pay in installments rather than pay the whole amount. This makes the insurance companies the most profitable in a settlement case.
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Source: www.articlecity.com
