What happens to your annuity in a divorce? The short answer is: it depends—but the “depends” is where people lose money. An annuity isn’t just an account balance you split like a checking account. It’s a contract with surrender rules, tax treatment, ownership language, beneficiary provisions, and sometimes powerful income guarantees that can’t be recreated once they’re broken. During divorce, an annuity can be marital property, separate property, or a mix of both, and the right method of division is often the difference between preserving retirement income and unintentionally shrinking it.

At Diversified Insurance Brokers, we help divorcing clients and their attorneys understand how annuities are treated, how carriers actually process divorce-related changes, and what you can do to protect value and future income while still reaching a fair settlement. Because annuities sit at the intersection of insurance and retirement planning, the best outcomes usually come from aligning the legal settlement language with the reality of how the annuity contract works in the real world.

This guide focuses on what most people want to know: whether the annuity is likely to be divided, what “value” should be used, how taxes and penalties can show up, how income riders change the math, and what the most common division methods look like. If you’re also trying to figure out whether you can keep your annuity intact, pair this page with our companion article: Can You Keep Your Annuity After Divorce?.

Step One: Is the Annuity Marital Property, Separate Property, or Both?

Divorce courts and settlement negotiations typically start with classification. An annuity purchased during marriage with marital income is usually treated as marital property, even if it’s titled in one spouse’s name. An annuity purchased before marriage is often separate property, but contributions made during the marriage—along with growth attributable to marital contributions—may be partially marital in many jurisdictions. If inherited or gifted funds were used, the annuity may be separate property unless those funds were commingled with marital assets.

What makes annuities tricky is that “when it was purchased” is only part of the story. Courts and mediators often focus on how it was funded and whether marital funds touched the contract. For example, a policy opened two years before marriage but funded heavily during the marriage may become partially marital. Likewise, a non-qualified annuity funded with separate property could become muddied if additional premiums came from a joint account. The more clearly you can document source of funds, the easier it becomes to negotiate a settlement that’s fair and avoids guesswork.

Ownership language matters too. Some contracts list one owner and one annuitant. Others include joint ownership or spousal continuation provisions. That contract language influences what changes are even allowed. A settlement can say “transfer ownership,” but if the carrier doesn’t allow a certain type of transfer on that product, you may be forced into a different method—often with avoidable cost. That’s why divorce settlements involving annuities should be drafted with the carrier’s processing rules in mind, not just the concept of fairness.

Step Two: What “Value” Are You Dividing—Account Value, Surrender Value, or Income Value?

One of the biggest mistakes in divorce is using the wrong number. An annuity statement often shows an account value, but the number that matters for a divorce settlement may be the surrender value after charges and any market value adjustment (MVA). And if the annuity has a lifetime income rider, it may also show an income base (sometimes called a benefit base) that is not cash, but drives future guaranteed income. These numbers can be very different, and divorcing couples can accidentally “trade away” value if they don’t understand which number they’re negotiating around.

Account value is commonly the accumulation amount used to credit interest. Surrender value is what you could actually receive today if you cashed out after surrender charges and MVAs. Income base is a contract-specific calculation that may increase over time and is used to determine guaranteed withdrawals if you activate an income rider. If your annuity’s purpose is future income, the income base matters. If the annuity’s purpose is accessible value, surrender value matters. If the settlement treats these numbers interchangeably, the division can be unfair or impractical.

When we review an annuity in a divorce context, we typically identify (1) the current surrender schedule and remaining surrender period, (2) whether an MVA applies and how it’s calculated, (3) what the free-withdrawal provisions are, (4) rider features and whether they transfer, prorate, or reset, and (5) any restrictions on splitting or reissuing the contract. That clarity helps your attorney decide whether you should keep the contract, split it, offset it with other assets, or reposition it.

Common Ways an Annuity Is Handled in Divorce

There are four practical approaches used most often, and each one has different tax and value consequences. The best method depends on whether the annuity is qualified or non-qualified, whether it has riders, and whether surrender penalties are significant. In many divorces, the “best” outcome isn’t the most obvious one. It’s the one that preserves the most value while still achieving a fair split.

1) Keep the contract intact and offset with other assets. This is often the cleanest approach when the annuity includes valuable benefits—like an income rider, an older contract with favorable terms, or a bonus crediting structure you don’t want to lose. One spouse keeps the annuity, and the other spouse receives equivalent value elsewhere (cash, brokerage assets, IRA share, or home equity). The advantage is simplicity and benefit preservation. The challenge is that you need enough other assets to make the split fair.

2) Split into two contracts (when the carrier allows it). Some carriers will create two contracts under a divorce decree. This can preserve tax deferral and give each spouse direct control. However, split rules vary widely. Riders may not transfer the way you expect, and some benefits may reset or prorate. For annuities with guaranteed income riders, splitting can materially change future income outcomes depending on how the rider is structured.

3) Surrender and divide the proceeds. This is sometimes used when the annuity is near the end of its surrender period, when penalties are minimal, or when the couple needs liquidity to settle other obligations. The downside is obvious: surrender charges and MVAs can reduce the net amount, and taxes can be triggered if the annuity is non-qualified and gains are withdrawn. It can still be the right move in certain scenarios, but it should be a conscious decision, not the default.

4) Share the income payments (for annuitized contracts or income already in force). If the annuity is already paying income, the divorce decree can allocate a portion of each payment to each spouse. This can work, but it requires careful drafting and ongoing coordination. It also raises questions about what happens if the owner dies, if payments change, or if the annuity has certain payout guarantees.

For a deeper dive into division methods, see How Annuities Are Divided in Divorce. If your main concern is preserving the contract itself, read Can You Keep Your Annuity After Divorce?.

Qualified vs. Non-Qualified Annuities: Why the Tax Wrapper Changes Everything

The annuity’s tax status determines what rules apply to division. This is one of the areas where “general divorce advice” can be dangerously incomplete, because annuities are often owned in retirement accounts (qualified) or outside them (non-qualified), and those two scenarios behave very differently.

Qualified annuities are held inside retirement accounts like IRAs. These are funded with pre-tax dollars, and any distribution is generally taxable. In divorce, the goal is usually to transfer the spouse’s share in a way that preserves retirement status and avoids unnecessary taxes and penalties. The exact process depends on the account type and custodian, but the principle remains the same: you want the transfer structured according to divorce-specific rules and processed through the proper channels so it’s not treated as a taxable distribution.

Non-qualified annuities are funded with after-tax dollars. Taxes are owed on the gain portion when it comes out, and the “last-in, first-out” treatment commonly means gains can be taxed first depending on how withdrawals are taken. In divorce, non-qualified annuities can sometimes be transferred incident to divorce, but it must be done correctly and aligned with carrier procedures. When it isn’t, a spouse can end up with taxable income or a penalty they didn’t anticipate.

When clients tell us, “We’re just going to transfer it and move on,” we slow things down and confirm the tax wrapper first. That’s often where the savings are. A settlement that looks fair on paper can become unfair after taxes if one spouse receives a pre-tax asset and the other receives an after-tax asset of the same nominal value. That’s why annuity division should be evaluated on an after-tax and after-fee basis—especially if surrender charges or MVAs are in play.

Surrender Charges and Market Value Adjustments: The “Hidden” Costs That Change the Split

Many annuities are designed for long-term holding periods. If you surrender early, you may face a surrender charge. Some fixed annuities and MYGAs also include a market value adjustment (MVA) that can increase or decrease the surrender value depending on interest rate movements and contract design. In rising-rate environments, MVAs commonly reduce surrender value, which means the annuity can be worth less than the statement’s account value if cashed out today.

If you’re trying to understand MVAs in plain language, read: What Is a Market Value Adjustment?. In divorce, MVAs matter because they can create a gap between what one spouse thinks they’re “receiving” and what they can actually access. If the settlement assumes full account value but the contract is surrendered, that gap becomes real money lost.

Free-withdrawal provisions can sometimes soften the impact. Many annuities allow a percentage to be withdrawn annually without surrender charges. But “free withdrawal” doesn’t always mean “free of taxes,” and it may not bypass an MVA depending on contract language. Timing also matters. If the surrender schedule drops at a certain contract anniversary, it may be worth coordinating the division timeline to avoid an unnecessary charge—so long as the legal settlement and both spouses’ needs allow it.

Income Riders, Bonuses, and Death Benefits: Features That Can Be Lost or Reduced

Riders and benefits are where annuities become more than just a number. A guaranteed lifetime withdrawal benefit (GLWB) rider can create predictable retirement income. A bonus credit can provide day-one value that improves long-term results. Enhanced death benefits can change the legacy planning outcome. In divorce, these benefits can be reduced, reset, prorated, or eliminated depending on what the carrier allows.

For example, an annuity might have an income base that is higher than the account value. That doesn’t mean you can “cash out” the income base, but it may materially change the future income stream. If the annuity is split, the income base might be prorated between the two contracts, or it might reset based on new issue terms. Some riders have waiting periods or roll-up features that change if ownership changes. Some joint-life income riders are specifically designed around spousal status, which can create issues post-divorce.

This is why “divide it evenly” isn’t always fair. Two halves of a contract are not always equal if splitting destroys a rider advantage. In many cases, the better approach is to keep the annuity intact with one spouse and offset with other assets. When that isn’t possible, the next best approach is often to plan the split in a way that preserves as much benefit value as possible, while being realistic about what the carrier will do.

If legacy planning is part of the concern, a good companion resource is Annuity Beneficiary Death Benefits, because beneficiary updates and death benefit structure often become a priority immediately after divorce.

Keeping vs. Repositioning: When Moving On Can Be Smarter Than Holding On

Sometimes the best outcome is keeping the annuity intact. Other times, the best outcome is preserving value while repositioning into a contract that better fits your post-divorce plan. The deciding factors are usually (1) the contract’s remaining surrender period, (2) whether the contract has unique rider value worth protecting, and (3) your new financial reality after settlement.

If the annuity is expensive to surrender but needs to be divided, one planning option is to offset the surrender/MVA hit by moving the proceeds into a contract that provides an upfront credit. That’s where bonus annuities can be relevant. You can learn more here: Best Upfront Bonus Annuity. The point isn’t “bonus equals better,” it’s that in some scenarios a bonus credit can help recover value lost through a forced liquidation—assuming the time horizon and product fit make sense.

For others, the priority is simply locking in competitive fixed rates or building a stable income plan after divorce. In those cases, looking at what’s available today is often useful, especially if your existing contract is outdated or no longer aligns with your goals. That’s why many clients review options through our Current Annuity Rates resource before finalizing a repositioning decision.

Documentation and Timing: Make the Settlement Something the Carrier Can Actually Implement

Even a well-negotiated divorce settlement can go wrong if the annuity paperwork is vague. Carriers typically require specific language and forms to process ownership changes, proportional splits, or divorce-related transfers. If the decree is unclear, the carrier may delay processing or require amendments. Timing matters too. If a contract anniversary is approaching, surrender charges may soon drop. If a rider milestone is near, an income calculation could change. If rates or crediting strategies are updated, it may affect new contract options if a repositioning is part of the plan.

The practical goal is to align your legal timeline with your annuity timeline whenever possible. That doesn’t mean delaying the divorce, but it does mean understanding whether a small timing adjustment could preserve value. We often see divorcing spouses forced into unnecessary surrender losses simply because no one checked when the surrender schedule stepped down or whether a carrier split option was available.

If you’re in the middle of divorce proceedings, it’s usually wise to obtain the annuity contract details early, not at the end. A contract review can reveal whether keeping the annuity intact is realistic, whether splitting is allowed, and what the financial impact of surrender would be. That information can materially improve negotiation outcomes.

How Diversified Insurance Brokers Helps

We’re a fiduciary, family-owned agency licensed in all 50 states. Our role in divorce-related annuity decisions is to provide clarity before irreversible moves are made. We help you understand the contract you own, what division methods are available, and how to preserve value and future income while still reaching a fair settlement. If a repositioning strategy is part of the plan, we also compare options across carriers so you can see the difference between “what you have” and “what’s available now,” including income-focused designs and principal-protected accumulation strategies.

Divorce is already stressful. Annuity decisions shouldn’t add another layer of uncertainty. If you’re trying to decide whether to keep, split, or reposition, start by understanding your contract’s actual constraints and costs. Once you know that, your attorney can draft a settlement that is both fair and workable.

To continue your research, you may also want to read How Annuities Are Divided in Divorce and Can You Keep Your Annuity After Divorce?. These pages work together as a practical divorce series, each covering a slightly different angle.

Related Topics to Explore

• How Annuities Are Divided in Divorce
• Can You Keep Your Annuity After Divorce?
• Market Value Adjustment Explained
• Annuity Free Withdrawal Rules
• Current Bonus Annuity Rates
• Best Upfront Bonus Annuity
• Annuity Beneficiary Death Benefits
• Current Annuity Rates