Annuities, Creditors, and Bankruptcy

What happens to an annuity if the contract owner declares bankruptcy? Is an annuity exempt from the claims of creditors? How would a creditor or bankruptcy trustee address an annuity asset? Are proceeds from an annuity protected from creditors' claims?

Some assets are protected from creditors by federal and/or state statute. This protection is usually granted to the debtor because the asset is considered essential for the debtor and the debtor's family to maintain at least a minimum level of financial well-being and avoid becoming a burden to the state. The extent of such creditor protection, however, is tempered by society's proper concerns for the creditor's rights to access the debtor's property to satisfy his legitimate claims.

A debtor's home, retirement plan, and individual retirement accounts (IRAs) are, perhaps, the most widely recognized favored assets because they help to ensure a debtor's financial subsistence. Since annuities often substitute for or supplement retirement plans and IRAs, annuities have in some states been exempted by statute from the claims of creditors. However, the exemptions afforded to annuities are usually limited and subject to the vagaries of the presiding courts.

The table below was reprinted from the Journal of Asset Protection, Research Institute of America. The table summarizes the state statutes relating to annuity assets which may or may not be exempt from creditors as of October, 2003. You are strongly advised to consult with a competent legal professional who is knowledgeable about the current statutes and court decisions in your jurisdiction before purchasing an annuity contract. The information in this table assumes that the purchase of the annuity does not constitute a fraudulent transfer under applicable federal or state law. If it did, any protections which may otherwise be afforded would be vitiated by the fact of the fraudulent transfer.

State Annuity Proceeds Applicable Section(s)
Alabama Maximum $250 per month of benefits under all annuity contracts exempt from creditors. Ala. Code §§ 6-10-8 and 27-14-32
Alaska Owner's interest in up to $12,000 of value of unmatured policy is exempt. Alaska Stat. §§ 09.38.025 and 09.38.030. Alaska Admin. Code Tit. 8 § 95.030.
Arizona Exempt only if qualified under Code §§ 401(a), 403(a), 403(b), 408, or 409. Ariz. Rev. Stat. §§ 20-1131 and 33-1126(A)(1) and (6), and (C)
Arkansas In re Hudspeth, 92 Bankr. 827 (1988), the court held that the state exemption contained in Ark. Code Ann. § 16-66-209 of the value of all insurance benefits without limitation is unconstitutional because it directly conflicts with Arkansas's Constitution.  Article 9 § 2 of Arkansas's Constitution imposes a $500 limited exemption from creditors claims.  The Bankruptcy Court refused to use § 16-66-209 to exempt property from inclusion in the debtor's estate pursuant to § 16-66-218(b)(7).  In Federal Sav. & Loan Ins. Co. v. Holt, 894 F.2d 1005 (8th Cir. 1990), the court also imposed a $500 exemption ceiling on life insurance benefits and policies' cash surrender value.
California Unmatured policy wholly exempt from creditors. Cal. Code Civ. Proc. § 704.100.
Colorado None. Colo. Rev. Stat. §§ 13-54-102(1)(l) and (s).
Connecticut Only if ERISA qualified. Conn. Gen. Stat. §§ 13-54-102(s), 38a-453 and 52-352b(s)
Delaware Maximum $350 per month of benefits under all annuity contracts exempt from creditors. Del. Code Ann. Tit. 18 §§ 2725 and 2728
District of Columbia Maximum exemption of $200 per month for a beneficiary providing principal support of a family or $60 per month for a beneficiary not providing principal support of a family. D.C. Code Ann. § 15-503
Florida Interest in proceeds of policy wholly exempt. Fla. Stat. §§ 222.13 and 222.14
Georgia Proceeds of policy exempt to extent reasonably necessary for support of debtor and dependents Ga. Code Ann. §§ 44-13-100(a)(2)(E), 44-13-100(a)(8), 44-13-100(a)(9) and 44-13-100(a)(11)(C).
Hawaii Proceeds payable to spouse, child, parent or other dependent is wholly exempt from insured's creditors. Haw. Rev. Stat. § 431:10-232
Idaho Maximum $1,250 per month of benefits under all annuity contracts exempt from creditors. Idaho Code §§ 41-1833 and 41-1836.
Illinois Proceeds payable to spouse, child, parent or other dependent is wholly exempt from insured's creditors. 215 Ill. Comp. Stat. § 5/238(a), 735. Ill. Comp. Stat. § 5/12-1001(f) and (h)(3).
Indiana If contract so provides, benefits payable to person other than person effecting policy are wholly exempt from creditors. Ind. Code § 27-2-5-1
Iowa Proceeds wholly exempt except for payments resulting from excessive contributions within prior year. Iowa Code §§ 627.6(6) and (8)(e)
Kansas Annuities qualifying under certain Kansas statutes wholly exempt. Kan. Stat. Ann. §§ 40-414(a) and (f), and 60-2313
Kentucky Maximum $350 per month of benefits under all annuity contracts exempt from creditors. Ky. Rev. Stat. Ann. §§ 427.110(1), 304.14-300 and 304.14-330
Louisiana Interest in proceeds of policy wholly protected from all creditors; provided that maximum $35,000 exempt if bankruptcy filed within nine months of policy issuance. La. Rev. Stat. Ann. § 22:647
Maine Maximum $450 per month of benefits under all annuity contracts exempt from creditors Me. Rev. Stat. Ann. Tit. 24-A, §§ 2428 and 2431, Tit. 14 §§ 4422(10) and (11).
Maryland Proceeds wholly exempt if payable to the spouse, child, or dependent relative of the insured. Md. Code Ann., Ins. § 16-111
Massachusetts None. Mass. Gen. Laws ch. 175 § 125
Michigan Proceeds wholly exempt. Mich. Comp. Laws § 500.2207
Minnesota Proceeds wholly exempt from creditors of person effecting the policy. Minn. Stat. §§ 61A.12 and 550.37(10) and (23)
Mississippi Exempt to extent reasonably necessary for support of debtor and dependent if on account of illness, disability, death, age, or length of service and qualifies under Code §§ 401(a), 403(a), 403(b), 408, or 409. Miss. Code Ann. §§ 85-3-1 and 85-3-11
Missouri Exempt to extent reasonably necessary for support of debtor and dependents provided benefits are by reason of age, illness, disability, death or length of service. Mo. Rev. Stat. §§513.430(7), (8) and (10)(e).
Montana None. Mont. Code Ann. §§ 33-15-511 and 25-13-609(4)
Nebraska Maximum $10,000 proceeds of policy exempt. Neb. Rev. Stat. §§ 44-371
Nevada Maximum $350 per month of benefits under all annuity contracts exempt from creditors. Nev. Rev. Stat. §§ 21.090(1)(k), 687B.260 and 687B.290
New Hampshire None. N.H. Rev. Stat. Ann. § 408:2
New Jersey Maximum $500 per month of benefits under all annuity contracts exempt from creditors. N.J. Stat. Ann. §§ 17B:24-6 and 17B:24-7
New Mexico Proceeds of policy wholly exempt from all creditors. N.M. Stat. Ann. §§ 42-10-3 and 42-10-5
New York Court has discretion to order "just and proper amount" paid to creditors with due regard to reasonable requirements of debtor and dependent family; provided maximum $5,000 exempt if annuity purchased within prior six months. N.Y. Ins. Law § 3212; N.Y. Debtor & Creditor Law § 283.
North Carolina Only individual retirement annuity under Code § 408 is exempt. N.C. Const. § 5; N.C. Gen. Stat. §§ 1C-1601 and 58-58-115
North Dakota Maximum exemption of $100,000 per policy and $200,000 aggregate (unless more is reasonably necessary for the support of insured and dependents), provided payable to spouse, children, or any dependent relative. N.D. Cent. Code § 28-22-03.1
Ohio Wholly protected from creditors of annuitant provided beneficiary is spouse, child or dependent. Ohio Rev. Code Ann. § 3911.10
Oklahoma Wholly protected from all creditors. Okla. Stat. Tit. 36 § 3631.1(A)
Oregon Maximum $500 per month of benefits under all annuity contracts exempt from creditors. Or. Rev. Stat. §§ 743.046 and 743.049
Pennsylvania

Proceeds payable to spouse, child or dependent relative of insured wholly exempt from creditors of insured.

Proceeds exempt from own creditors to extent necessary to provide for maximum income or return of $100 per month.

42 Pa. Cons. Stat. § 8124(C)
Rhode Island Only individual retirement annuity under Code § 408(b) is exempt. R.I. Gen. Laws §§ 9-26-4(11) and 27-4-11
South Carolina Exempt if on account of illness, disability, death, age, or length of service and qualifies under Code §§ 401(a), 403(a), 403(b), 408, or 409. S.C. Code Ann. §§ 14-41-30(8), 15-41-30(10)(E) and 38-63-40
South Dakota Maximum $250 per month of benefits under all annuity contracts exempt from creditors. S.D. Codified Laws §§ 43-45-6, 58-12-4, 58-12-6 and 58-12-8
Tennessee Beneficiary's interest in amounts payable under policy wholly protected from creditors of insured provided beneficiary is spouse, child or dependent relative of insured. Tenn. Code Ann. § 56-7-203
Texas Policy proceeds wholly exempt from all creditors. Tex. Ins. Code § 21.22
Utah Assets held and proceeds paid to extent reasonably necessary for support of beneficiary and dependents. Utah Code Ann. §§ 78-23-6, 78-23-7.
Vermont Maximum $350 per month of benefits under all annuity contracts exempt from creditors. Vt. Stat. Ann. Tit. 12 §§ 2740(18) and (19)(H); Tit. 8 §§ 3706 and 3709
Virginia None. Va. Code Ann. § 38.2-3122
Washington Maximum $250 per month of benefits under all annuity contracts exempt from creditors. Wash. Rev. Code §§ 48.18.410 and 48.18.430
West Virginia None. W. Va. Code § 33-6-27
Wisconsin Wholly exempt provided benefits are by reason of age, illness, disability, death or length of service. Wis. Stat. § 815.18
Wyoming Maximum $350 per month of benefits under all annuity contracts exempt from creditors. Wyo. Stat. Ann. §§ 26-15-129 and 26-15-132

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Important Notice: This information is not intended to be a recommendation to purchase an annuity. You should consult with a financial planner to determine if an annuity is a suitable product in your situation. Also, be advised that tax information published at this site is written to support the promotion of annuities. It is based on limited facts and should not be relied upon. You should consult with your own tax and legal advisors for an opinion about what could or should be done in your particular situation.