Divorce can raise difficult questions about how to divide assets — and annuities are often one of the most misunderstood. Whether you purchased your annuity for income, accumulation, or retirement protection, its division in a divorce depends on the contract type, when it was funded, and your state’s laws. At Diversified Insurance Brokers, we help clients nationwide understand how annuities fit into their overall financial picture before, during, and after divorce.

Because annuities combine investment and insurance components, they’re treated differently than typical investment accounts. Some are considered marital property, while others remain separate. Understanding which category yours falls into is essential to protecting your income and long-term financial stability.

Understanding Annuities in Divorce

Annuities are designed to provide guaranteed income for life or for a set number of years. They can be funded with personal savings or through retirement accounts such as IRAs or 401(k)s. During divorce, annuities must be accurately valued and divided according to equitable distribution or community property rules, depending on your state.

• Marital Annuities: Funded during the marriage using shared income or assets. These are typically subject to division.
• Separate Property Annuities: Purchased before marriage or with inherited/gifted funds. Usually remain separate unless commingled.

Identifying how your annuity was funded — and whether it’s qualified or non-qualified — helps determine how it should be handled in a divorce settlement. Our fiduciary team can review your contract and explain what options protect your income best.

Key Factors Courts Consider

When determining how an annuity should be divided, courts and mediators typically examine:

• Type of Annuity: Fixed, indexed, or variable annuities require different valuation methods.
• Ownership: Individual vs. joint ownership can determine who retains control after the divorce.
• Funding Source: Qualified annuities (in IRAs or 401(k)s) follow retirement division laws; non-qualified annuities are handled as taxable investments.
• Income Rider Value: If your contract includes a lifetime income rider, its benefit base may differ from its cash value and must be considered separately.
• State Law: Community property states divide assets equally; equitable distribution states divide based on fairness.

Even small valuation mistakes can lead to costly, uneven settlements or unexpected taxes. That’s why coordinating between your attorney and a knowledgeable annuity advisor is essential.

Qualified vs. Non-Qualified Annuities

The tax structure of your annuity determines how it can be divided:

• Qualified Annuities: Held inside IRAs or 401(k)s, funded with pre-tax money. Division typically requires a Qualified Domestic Relations Order (QDRO) to transfer funds without taxes or penalties.
• Non-Qualified Annuities: Funded with after-tax money and divided through ownership transfer or proportional payouts. Taxable events may occur if the division isn’t structured correctly.

If you’re unsure whether your contract is qualified or non-qualified, our advisors can review your policy and help you avoid costly errors. You can also view current annuity rates or request a no-obligation review of your existing policy.

How Annuity Division Works

Courts typically divide annuities in one of several ways, depending on contract type and the couple’s settlement preferences:

• Full Surrender and Division: The contract is liquidated, taxes are paid, and proceeds are divided between spouses.
• Transfer of Ownership: One spouse keeps the annuity while the other receives an offsetting asset, such as a retirement account or equity in the home.
• Split Contract: The insurer issues two new contracts, one for each spouse, preserving tax deferral where possible.
• Income Sharing: In immediate annuities, future payments may be divided based on court order.

Each method carries its own pros, cons, and tax implications. We help clients identify the most efficient structure for minimizing loss and preserving future income potential.

Using a Bonus Annuity to Offset Surrender or MVA Losses

Dividing or surrendering an annuity can result in loss of value through Market Value Adjustments (MVAs) or surrender charges. A strategic way to recover part of that loss is through a bonus annuity. These contracts often provide upfront credits (5–10%) that can help restore lost value while maintaining tax deferral and principal protection.

This strategy is particularly effective when part of a divided annuity is reinvested. It allows you to rebuild value quickly and reestablish income potential while offsetting penalties or charges.

Post-Divorce Income Planning with Annuities

Once your divorce is finalized, focus shifts from division to rebuilding stability. Many clients use annuities to create new guaranteed income streams, protect assets, and regain long-term financial confidence. Options include:

• Fixed Indexed Annuities for growth potential with downside protection.
• IRA Annuity Options for retirement planning flexibility.
• Annuity Beneficiary Death Benefits to protect your heirs.
• Single-Pay Long-Term Care Insurance to secure future care needs.

If you’d like to learn more about whether you can keep your annuity intact after settlement, see our related article on keeping your annuity after divorce.

Why Work with Diversified Insurance Brokers

We’re a fiduciary, family-owned agency licensed in all 50 states. For over 40 years, we’ve helped clients protect income, preserve value, and rebuild after life’s biggest financial transitions. Our advisors shop more than 75 top-rated carriers to find competitive rates and features that fit your goals — with no sales pressure and transparent guidance.

Related Topics to Explore

• Can You Keep Your Annuity After Divorce?
• What Happens to Your Annuity in a Divorce?
• Best Upfront Bonus Annuity
• Annuity Free Withdrawal Rules
• Annuity Beneficiary Death Benefits
• Best Short-Term MYGA Annuities