How to Calculate Structured Settlements eHow

By Erin Watson-Price, eHow Contributor

Structured settlements are annuities paid to an individual over the course of time. Such settlements often occur in cases of personal injury. For example, an insurance company agrees to pay a plaintiff $300,000 over the course of 25 years. This means the plaintiff will receive $1000 a month once the structured settlement begins to pay out. However, the plaintiff may choose to liquidate his or her structured settlement in a lump sum, either to pay off an immediate debt, buy a home or car or take care of any other pressing expenses. Doing this requires determining the time value of money. The time value of money takes into account two factors. First, inflation devalues money, so money today is worth less than money tomorrow. Second, money today can be invested and grow, while money promised cannot gain in value.

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     Determine the current remaining value to be paid. If the structured settlement has not begun to pay out, this amount will be the total amount of the settlement. However, if you have begun to receive payments, calculate the remainder. For example, if you have been receiving $1000 per month for 5 years on a $300,000 settlement, the current balance of the structured settlement is $240,000.

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     Contact a structured settlement liquidation company to get your discount rate. The discount rate will depend on tangible numbers such as the length of your settlement and current and projected inflation rates. The discount rate will also depend on an intangible variable: risk. The company paying your settlement may go bankrupt and be unable to pay or finish paying your settlement. Laws may change, allowing the person or organization to appeal and cease or lower payments. The Investment FAQ states that overall, a discount rate should average between eight and 14 percent.

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Multiply the current value of your structured settlement by the discount rate to determine the lump-sum value. This number will be surprisingly lower than the current value. Take the previous example. The value of your structured settlement is currently $240,000. However, when multiplied by a 14 percent discount rate, your lump-sum payout would be $33,600.

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Consider how much money you actually need. A structured settlement can be liquidated in part or in whole. If you only need $10,000 to clear your debts or make a business investment, consider liquidating only part of your structured settlement. This will allow you to maintain a monthly income, though lower than before, and make financial decisions previously unavailable.