Discount Rates Explained

Discount rates are typically disclosed to you so that you can properly judge fairness.
By lcpayments107-27-2222
LC Payments
LC Payments are life contingent payments professional with 20 years experience.

If you have sold structured settlement or life contingent payments in the past, chances are you’ve heard of discount rates. In most states, this is something that must be disclosed to you in writing as a way of making you aware of the financial consequences of the transaction and so that you have a way of judging fairness. 

However, because the transfer of life contingent payments is not a loan, the concept of a rate can be difficult to understand for some. In this post, LC Capital breaks down the key concept.

What Is A Discount Rate?

Put simply, the discount rate is a number used to discount the value of future payments. In other words, a dollar today is worth a dollar, but if you can only collect that dollar five years from now, it’s value depends on the discount rate used. Below are three different discount rates applied to that dollar.

  • Using a 5% discount rate: $0.78
  • Using a 10% discount rate: $0.62
  • Using a 15% discount rate: $0.50
 As you can see, the value of a dollar is inversely related to the discount rate (in other words, as the discount rate goes up, the value of
the dollar goes down.)

What Is A Good Discount Rate?

As with interest rates, lower is better in this case. However, the discount rate applicable to your transaction depends on a few factors, and we cover this in more depth in this blog post. But in a nutshell, large transactions that involve payments over a significant period of time usually involve very low discount rates – 5-6% is becoming more and more common in the settlement purchasing industry.

If payments are life contingent, the health of the original payment beneficiary must also be taken into account. For a customized quote on life contingent payments, please call LC Capital at (833) 760-4006 or submit an online inquiry.

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