Divorce & Annuities: A Potentially Costly Break-Up
Divorces usually come at a cost – and a potentially bigger one if a variable annuity is involved.
Variable annuities are a common investment staple in today’s portfolios. During a divorce, however, this shared asset may turn costly when split among a divorcing couple. Splitting a variable annuity means paying both a surrender charge and a penalty fee for early withdrawal if the annuity is part of an individual retirement account.
As reported March 18 by Investment News, divorce attorneys often split annuity contracts in divorce settlements without realizing the potential financial consequences that can result.
The Investment News article cites the case of a couple with a $500,000 variable annuity. Splitting the annuity entailed paying an 8% surrender charge and a 10% penalty for early withdrawal from the couple’s IRA. Instead of getting the $250,000 that one spouse expected, she received nearly $50,000 less.
“It’s a big problem, said adviser Lili A. Vasileff, president of Divorce and Money Matters LLC and president of the Association of Divorce Financial Planners Inc., in the Investment News story. “Most attorneys think these annuities can be divided, and don’t wait for the consequences.”
The financial picture is even more troublesome for couples who opt to do divorce agreements on their own because they’re less likely to factor in the financial consequences of splitting an annuity. Not only will they likely have to pay surrender charges, but they’ll also encounter losses of accrued living or death benefits from excess withdrawals.
Variable annuities have become an increasingly popular investment vehicle in recent years. Sales of variable annuities reached $155.5 billion in 2011, a 12% increase from 2010, according to the Insured Retirement Institute.
The annuity itself is a contract between you and an insurance company whereby the insurer agrees to make periodic payments to you beginning either immediately or at some future date.
A variable annuity offers a range of investment options. These options typically include mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. The value of the variable annuity varies depending on the performance of the investment options selected.
Variable annuities also can be complex products, with riders that are often mired in fine print and contain hard-to-understand information and industry jargon. In most cases, variable annuities are not liquid in the immediate term, and every contract contains its own specific rules on how an annuity can ultimately be divided.
And, as in incidences of divorce, you’ll pay several charges for withdrawing money early from a variable annuity. These charges are in addition to administrative fees, purchase fees, and other special fees that you pay for such features as stepped-up death benefits and guaranteed minimum income benefits.