Annuities are insurance policies designed and sold by life insurance companies. Annuities are typically characterized by providing ongoing payments to an annuitant, often as a measure against outliving other retirement income. Like life insurance policies, annuities come with an initial "free look" period for consumers to fully examine the policy. These types of policies normally have special exemptions from creditors. Often, these exemptions contain limitations and only protect a portion of your annuity benefits.
States with high numbers of retired residents often have more protective exemptions for retirement assets. Make sure you understand how California treats annuity contracts before and during the free look period.
Who Is a Creditor?
A creditor is an entity or persons who are owed an outstanding balance of money. Individuals who owe a debt are known as debtors. Someone who has been directed to pay a debt due to a legal judgment is known as a judgment debtor.
Bear in mind that creditors are not just bill collectors or collections agencies. Creditors are legally permitted to pursue the assets of debtors in order to settle payments of debt. A judgment resulting from a lawsuit can put unprotected assets at risk. Exempt assets can offer asset protection against such settlements.
Why Exempt Annuities From Creditors?
The federal law that sets minimum protective standards for exempting retirement instruments is known as the Employee Retirement Income Security Act (ERISA). Life insurance and annuities are considered ERISA-qualified accounts. This law was developed in order to provide protections for specific assets to make them inaccessible for creditors to claim in order to settle debts.
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.
While there are minimum federal regulations, individual states have their own guidelines for the treatment of annuities as exempt based on the cash value of policies. This is important because annuities are subject to the laws of the state in which policies are purchased. Courts have the power to render judgments regarding assets, regardless of exempt status.
How Are Annuities Protected in California?
Unmatured annuities, aside from loan values, are exempt without a claim according to the State of California. Unmatured annuities and life policy loan values are exempt in judgments up to $13,975 for an individual, spouses are entitled to separate exemptions but may be combined based on court decision.
Matured annuity benefits are protected based on how much is necessary for the debtor to support their household, including any spouse or dependents. These guidelines stand for all annuities purchased in CA, regardless of whether the annuitant moves to another state.
What's the Benefit of Creditor Protection?
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. Many people do not think of protection from creditors when planning for retirement, but it is an important consideration.
Are There Other Considerations Around Annuities and Creditors?
Whether or not you are required to pay from your annuity may be subject to a court ruling, especially regarding amounts that are considered reasonable for "support." If your contract has matured, a creditor may be able to collect money from the annuity contract. If your contract term is about to mature, consider converting your annuity to monthly payments, called annuitization.
While you should pay all debts you legally owe, you should also be aware of the state laws that provide protections for your retirement savings. Do not assume that an annuity will follow the asset protection guidelines of your current state of residence. If you purchased an annuity in California and later move to Florida, the asset protection on that annuity is not automatically exported to meet Florida standards.
Note, it is a bad idea to purchase an annuity after falling into financial trouble or declaring bankruptcy as this action may be interpreted as an attempt to defraud creditors. Seeking appropriate legal counsel may be prudent for issues related to debt, estate planning and the protection of assets.
I am a Registered Financial Consultant with 6 years experience in the financial services industry. I am trained in the financial planning process, with an emphasis in life insurance and annuity contracts. I have written for Demand Studios since 2009.