Annuities are insurance policies designed and sold by life insurance companies. These policies often have special exemptions from creditors. Often, these exemptions contain limitations and only protect a portion of your annuity benefits. However, in California, the exemption is unusually strong. Make sure you understand how California treats annuity contracts in regards to judgments.
The purpose of exempting your annuity from creditors is to provide you with money that you can live on during your retirement so that you don't become a burden of the State of California. If a creditor is able to take all of your annuity policy assets, you may have to apply for additional welfare and social programs. This increases the cost to the state and, ultimately, to taxpayers.
The significance of excluding annuities from creditor collections in California is that you are assured that your annuity will not be taken from you because of a judgment. The annuity is fully protected as long as it has not matured. This means that if the contract term is 10 years, the annuity does not reach full maturity until the end of the 10 years and you are protected for those 10 years from judgments.
The benefit of creditor protection in California is that you are assured that you will have your retirement savings intact during the contract term. You can use the annuity funds' withdrawal provisions and even draw an income from the annuity as you would if you did not have a judgment against you.
Even though your annuity is fully protected during the contract term, an annuity may be held past its contract term without being renewed. If your contract has matured, a creditor may be able to collect money from the annuity contract. Whether or not you are required to pay from your annuity may be subject to a court ruling. However, if you convert your annuity to income payments, you may continue the exemption from creditors.
While you should pay all debts you legally owe, you should also be aware of the laws that provide protections for your retirement savings. If your contract term is about to mature, consider converting your annuity to monthly payments, called annuitization, if you need the money to live on.
- Immediate Annuities: Annuities, Creditors, and Bankruptcy
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007