Present value

In plain English: present value is what a stream of future money is worth today. When a claim pays you now for losses you'll suffer over years, like lost wages or care costs, the total is reduced because you can invest the lump sum and earn a return in the meantime.

The idea behind it

Say you'll need $10,000 of care every year for 20 years. Paying $200,000 up front would overcompensate you, in theory, because the money you don't need until year 15 has 15 years to grow. So the court or insurer works out the smaller sum that, invested sensibly, would cover each year's cost as it falls due and run out at the end. That smaller sum is the present value.

The key figure is the discount rate: the rate of return you're assumed to earn above inflation. The higher the rate, the smaller your lump sum. Over long periods, even half a percentage point makes a big difference.

How it's done in different places

• US: an economist usually gives evidence on the discount rate and growth assumptions, and the jury or judge decides. Methods and rules differ by state, and the other side often has its own economist with a different view.
• England and Wales: the discount rate for personal injury is set by the Lord Chancellor and reviewed periodically. Lawyers apply it using the Ogden Tables, which combine the rate with life expectancy and working-life data to give a multiplier. Scotland and Northern Ireland set their own rates.
• Canada: some provinces set the discount rate in court rules or legislation, which keeps arguments over it to a minimum. Check the rule in your province.

Why it matters to you

For small claims, present value barely matters. For serious injuries with decades of lost earnings or care, it can shift the final figure by a very large amount. It's also where the assumptions hide: how long you're expected to live, when you'd have retired, how fast care costs rise compared with general inflation. Each is worth questioning.

Avoiding the risk altogether

A lump sum puts the investment risk on you. If returns disappoint or you live longer than predicted, the money can run out. A structured settlement or, in the UK, a periodical payment order avoids this by paying regular sums for as long as you need them.

Next: future care costs · future earning capacity · expert witness.

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