Present Value

What Does Present Value Mean?

Present value refers to the current amount of money required to equal a future sum, considering future cash flows and the rate of return or interest.

It is also known as discounted value or present discounted value.

Insuranceopedia Explains Present Value

Present value is determined by knowing the future cash flow and the associated interest rate. A higher rate of return results in a lower present value.

Present value plays a key role in various financial decisions, such as determining the price of stocks and bonds. In insurance specifically, present value calculations help actuaries figure out the dollar amount needed today to cover future payouts, which is the math behind pricing annuities and other long-dated benefits. In corporate settings, it is often considered an estimate rather than an exact calculation due to the numerous variables in the financial market.

The same idea applies to life insurance policies that build cash value, since the cash value grows toward a future amount based on a guaranteed or credited interest rate.