Compound Interest

What is 'Compound Interest'? 

Investopedia states “Compound interest (or compounding interest) is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th-century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount. “

In many Structured Settlement Annuities this is most commonly seen on monthly payments which have a yearly Cost of Living Adjustment (COLA) which could be anywhere from 1% - 5% in some Structured Settlement annuity policies. 

“The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest. Thus, the amount of compound interest accrued on $100 compounded at 10% annually will be lower than that on $100 compounded at 5% semi-annually over the same time period.” 

One example of where compound interest works against us very rapidly are student loans. These will compound daily, which creates a hole we can never seem to get out of when just making the minimum interest payment. This is why it takes people such a long time to pay them off. Many people have chosen to finance schooling in a variety of different methods. Some have even chosen to use their Structured Settlement annuity policies to help. A great example of where it can work to our advantage is through investments, by compounding you generate more return on an asset’s reinvested earnings. All you need for it to work is the reinvestment of assets and time.

Many people think their Structured Settlement annuity policies are a product of cash in a bank waiting for the payout dates, but in actuality they are a sub product of compounding assets owned by the companies making payments to the specific individual or trust.