What Happens to Your Annuity in a Divorce?
What happens to your annuity in a divorce? It’s one of the most common yet misunderstood questions in asset division. An annuity isn’t just an account balance—it’s a contract with future guarantees, surrender rules, tax consequences, and often income riders. During a divorce, mismanaging that complexity can be expensive.
At Diversified Insurance Brokers, we help divorcing clients, spouses, and attorneys clarify how annuities are treated, split, and protected throughout a settlement. Because annuities sit at the intersection of insurance and retirement planning, getting them right requires both legal coordination and financial insight.
When an Annuity Is Part of the Marital Estate
If the annuity was acquired or funded during the marriage—or if marital funds were used—it’s frequently considered marital property subject to division. Even if the contract started before marriage, later contributions or growth during the marriage may be treated as marital in many states. Ownership structure matters too: some contracts are jointly owned, others individually owned. Division depends on the contract language, state law (equitable distribution vs. community property), and how premiums and gains were handled.
Common Ways to Divide an Annuity
- Transfer of ownership: One spouse becomes the owner and the other receives offsetting assets (e.g., more home equity). This can avoid cashing out the contract.
- Split into two contracts: Many carriers allow a proportional division into two annuities so each spouse keeps tax-deferred growth and control.
- Surrender & divide proceeds: You can partially or fully surrender, pay any surrender charges or market value adjustments (MVAs), then divide the net cash value.
- Share future income payments: If payments have already started, the decree can allocate a percentage of each payment to each spouse.
Qualified vs. Non-Qualified Contracts
Qualified annuities (held in an IRA/401(k)/qualified plan) are often divided via a court order or plan-approved process to avoid unintended taxes and penalties. Non-qualified annuities (funded with after-tax dollars) don’t typically require a retirement-plan order, but transfers and splits still need to follow carrier procedures to preserve tax deferral and contract benefits.
Taxes, Surrender Charges, and MVAs
Depending on the method used, division can be structured to avoid taxable distributions. However, if funds are withdrawn, the gain portion is taxable as ordinary income and may be subject to a 10% early withdrawal penalty if under age 59½. Also review your contract for surrender charges and any Market Value Adjustment (MVA); both can affect the net amount available to split.
Riders, Bonuses, and Death Benefits
Features like guaranteed lifetime withdrawal benefits (GLWBs), death benefits, or upfront bonuses may change if the contract is transferred, split, or surrendered. Some benefits prorate; others reset or may not carry over. Always confirm how the insurer will treat income bases, roll-ups, and waiting periods before you finalize the settlement.
Keeping vs. Repositioning the Contract
Sometimes, the most efficient outcome is to keep the contract intact and use other assets to equalize the division. In other cases—especially when surrender charges are modest or the contract no longer fits your goals—repositioning can make sense. If charges or MVAs are a concern, consider whether a bonus annuity could offset a portion of the cost when you move to a new, better-fit contract (subject to product availability, suitability, and your time horizon).
Documentation and Timing
Your settlement should clearly state who owns the annuity, how it will be divided, and any deadlines. The insurer will require specific paperwork and may have its own forms for ownership changes or proportional splits. Acting promptly helps avoid complications if the contract anniversary passes, a rider milestone is reached, or rates/crediting methods change.
Related Topics to Explore
- Market Value Adjustment Explained
- Best Upfront Bonus Annuity
- Current Annuity Rates
- How Annuities Are Divided in Divorce
- Can You Keep Your Annuity After Divorce?
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FAQs: What Happens to Your Annuity in a Divorce?
Is my annuity considered marital property?
Often yes, if premiums were paid or growth occurred during the marriage. Rules vary by state and by whether your state follows community property or equitable distribution.
How are annuities typically divided in a divorce?
Common methods include transferring ownership to one spouse with an offset, splitting the contract into two, sharing future income payments, or surrendering and dividing net proceeds.
What’s the difference between qualified and non-qualified annuities in divorce?
Qualified annuities inside retirement accounts may require a QDRO or plan-approved order. Non-qualified annuities (after-tax dollars) don’t need a QDRO but can have tax and contract implications when divided.
Will I owe taxes if we split the annuity?
Transfers that follow divorce rules can be tax-free, but cash-outs or withdrawals may be taxable and, if under 59½, could face a 10% penalty. Always coordinate with tax and legal professionals.
Can we lose rider benefits (like income or death benefits) when splitting?
Possibly. Some riders don’t transfer, or benefits may be reduced or reset when ownership changes or contracts split. Review the policy and get written confirmation from the insurer.
What about surrender charges and Market Value Adjustments (MVAs)?
Surrendering during the charge period may reduce the value available to divide. MVAs can also increase or decrease proceeds depending on interest rate movements and contract terms.
Can an annuity be split without surrendering?
Yes. Many insurers allow a contract to be partitioned into two new contracts or transferred to one spouse to avoid surrender—subject to the carrier’s rules and the divorce order.
How are annuities already paying income handled?
Courts may order future payments to be shared based on a set percentage, or the contract may be restructured if the carrier permits.
How is the annuity valued for the settlement?
Negotiators consider account value, surrender charges, MVAs, outstanding loans (if any), and the economic value of riders (e.g., lifetime income). A current statement and carrier letter help.
Can a 1035 exchange help in a divorce?
Sometimes. After a transfer is completed per the divorce decree, a 1035 exchange may reposition the annuity without current taxation. Confirm timing and ownership rules first.
What paperwork do we need to split the annuity?
The carrier will require the divorce decree and any supplemental forms. Qualified assets may need a QDRO or plan-approved order. Get written carrier approval before finalizing terms.
Should I keep or replace my annuity after the divorce?
It depends on income needs, surrender schedule, rider value, and taxes. Compare against current options—like fixed or income annuities—before deciding to keep, split, or exchange.
