Investors often have confusion about the rate of return used in annuities in general, and in the secondary marketplace in particular. DCF Income Payments are in reality quite simple- they are nothing more than an amortizing payment stream, with each payment containing principal and interest. It is basic Discounted Cash Flow (DCF) math that uses a discount rate and an amortization schedule to arrive at the net present value, or purchase price.
DCF Income Payments originate as structured settlements of personal injury cases that include defined future payment streams backed by annuities.
Individuals who sell some or all of their future payments do so in a court-ordered assignment process whereby the annuity issuers and legal counsel comply with state-specific transfer laws and IRS statutes. DCF Exchange is a buyer of these payments and distributes DCF Income Payments through a network of financial advisors nationwide, including this website.
Purchasers of DCF Income Payments become the new payee of these transferred, in-force payment streams backed by annuities. At no time are transferred payment streams pooled, aggregated, managed by or subject to fees of a manager.
All purchaser acquisition funds and assigned payments are handled by a state and federally regulated bank and trust company in a dedicated escrow account environment.
DCF Income Payments come in three categories:
For Income Now, use Immediate Income DCF Payments
For Income Later, use Deferred Income DCF Payments
For Safe Growth, use Lump Sum DCF Payments
DCF Income Payments Come From Top Rated Carriers
UNDERSTANDING RATES ON DCF INCOME PAYMENTS
The amortization schedule shows the principal and interest component of each payment. Amortization refers to the reduction of a debt or investment over time by paying back the debt over the period. With amortization, each payment is comprised of both a principal repayment component and an interest component on the debt/investment.
After each payment, the remaining principal is the loan or investment balance that is still outstanding. As more principal is repaid with each passing payment, less interest is due/received on the adjusted principal balance. Over time, the interest portion of each monthly payment declines and the principal repayment portion increases.
Amortization is most commonly encountered by the general public when dealing with either mortgages or car loans but in this case, refers to the periodic principal reduction plus the interest returned to an investor over the life of a DCF Income Payments.
The price paid for a DCF Income Payment (also referred to as a secondary market payment ) is calculated using the internal rate of return on the payments (IRR). This is the rate that is applied to the diminishing principal balance each month until all the principal and interest has been returned to the investor.
TIME VALUE OF MONEY EXAMPLE
Discounted cash flows involve the concept of Time Value of Money- a dollar tomorrow is worth less than a dollar today. How much less? That requires the ‘Discount Rate’ to calculate, and discount rate and effective rate are synonymous for these investments.
Here’s a simple example:
$100 in 1 year at a 10% discount rate will cost $90.91 today.
A $90.91 investment today at a 10% Effective rate with monthly compounding will yield $100 in 1 year.
CALCULATING EFFECTIVE RATE FOR YOURSELF
The Effective Interest rate is also equivalent to the Internal Rate of Return, or IRR. To calculate in MS Excel, use the formula XIRR=((payments),(dates),0). This formula calculates the discount rate, or effective rate, for a given series of payments on definite dates. XNPV may also be used to solve for the purchase price of a series of payments on definite dates at a known discount rate.
Click Here for an Excel sheet of the example above. Now, because of slight variations in the timing of amortization credits, discounted cash flow calculations in an amortization calculator will end up with slightly different values from MS Excel, and XIRR may vary by a few thousandths of a point. DCF Exchange, the secondary market annuity industry leader, uses amortization calculation in its inventory display tools.
Reach out to us if you’d like to:
- Schedule a 1-on-1 video call to discuss your specific needs and situation
- Ask questions about products, carriers, or DCF Income Payments
- Discuss how a DCF Income Payments and newly-issued annuities may (or may not) fit into your portfolio