Annuities for Credit Protection

People buy annuities for their protection. They can protect your principal against market loss. They are favored for their protection against taxation, and they provide protection from expensive and time consuming probate proceedings.  Annuities have long been thought of as safe havens for protection against lawsuits and creditors, but as many people have discovered, the federal laws that provide for exemptions of annuity assets are somewhat limited and are further complicated by the conflicting layers of state laws governing asset protection.  The bottom line is that anyone who is looking at annuities as an asset protection vehicle needs to do their homework before committing their funds or filing for bankruptcy.

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Annuities are no Friends of the Feds

The limitations of the federal law stem from the court’s definition of a protected individual.  Bankruptcy courts have ruled that an annuity owner and dependents who are under assault from creditors may only receive payments to the extent that they are “reasonable necessary” for the support of the owner if he is sick, disabled, aged, or dead.  That’s a tough test for most people to meet.

Annuities Fare Better with the States

Lawsuits are generally state-related issues and, with a few exceptions, the states offer some level of protection for annuity owners against claimants.  Here is where it can get a bit convoluted.  Each state has its own exemption limits, so it would be important to know how your state treats exemptions for annuity assets.  14 states offer unlimited exemptions, meaning that 100% of the annuities benefits are exempt from creditor claims. 20 states offer partial protection where some stated amount or percent of the benefits is allowed to be received or there is a cap on the amount that can be received monthly. Then, there are 16 states provide little or no protection.

Some of the states that offer some form of protection do so regardless of where the annuity was purchased, as long as the annuity owner is a resident there.  Then again, some states don’t.  Most all of the states aren’t inclined to provide protection if it is determined that the annuity was purchased for the purpose of defrauding a creditor or impeding their ability to collect.  Legal experts agree that, in all cases, annuities that designate a spouse or dependent children as beneficiaries are afforded the greatest amount of protection.

Many of the states that offer only partial protection do so by capping the monthly payment amount. In most cases the cap is as low as $250 per month.  It can also be construed from this that only annuity payments made to the annuitant or beneficiaries are protected.  A few of the partial protection states exempt the cash value up to a limit, such as $100,000, but there are caveats. Cash value protection comes only if the annuity has been held for a certain period of time.

In those states that offer minimal protection, it has been found that, annuities that have been structured with a settlement option that is making payments to a spouse or dependents, may receive some exemptions, but this is not assured. 

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Is Your Annuity Protected?

Annuities that are held by residents of full protection states are considered to be an excellent asset protection vehicle, so long as they were not purchased with the intent to defraud or delay a creditor.  If you live in a partial protection state, it’s important to know what the exemptions are and to review some recent case law on annuity exemptions.  You may find that some courts are more lenient than others in increasing the exemption but it is usually based on a determination of need relative to the person’s available income and assets.  A word of caution: What the state giveth, the state can take away. Protection laws do change and what is protected today may not be tomorrow.

If you live in a non-protection state, annuities should not be considered for asset protection.  The one consolation is that these exemption laws are in a state of flux. Many are antiquated and they are constantly being updated.  You’re best chances for an exemption comes with annuities that are paying income based on a settlement option and include a spendthrift clause.


Your annuity may very well be a solid protection vehicle, but, then again, it may not be.  The intent of this article was not to provide a complete clarification of the use of annuities for credit protection.  Unfortunately, that would require more space than is allowed here.  Rather, it was our intent to alert annuity owners to the need to study the protection laws in your state.  Better yet, if you are considering a bankruptcy filing or the purchase of an annuity for credit protection, consult with a legal expert who is knowledgeable in this area.

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