assignment of annuity contract

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What Is Collateral Assignment (of a Life Insurance Policy)?

Meredith Mangan is a senior editor for The Balance, focusing on insurance product reviews. She brings to the job 15 years of experience in finance, media, and financial markets. Prior to her editing career, Meredith was a licensed financial advisor and a licensed insurance agent in accident and health, variable, and life contracts. Meredith also spent five years as the managing editor for Money Crashers.

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

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If you assign your life insurance contract as collateral for a loan, you give the lender the right to collect from the policy’s cash value or death benefit in two circumstances. One is if you stop making payments; the other is if you die before the loan is repaid. Securing a loan with life insurance reduces the lender’s risk, which improves your chances of qualifying for the loan.

Before moving forward with a collateral assignment, learn how the process works, how it impacts your policy, and possible alternatives.

Collateral assignment is the practice of using a life insurance policy as collateral for a loan . Collateral is any asset that your lender can take if you default on the loan.

For example, you might apply for a $25,000 loan to start a business. But your lender is unwilling to approve the loan without sufficient collateral. If you have a permanent life insurance policy with a cash value of $40,000 and a death benefit of $300,000, you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you authorize the insurance company to give the lender the amount you owe if you’re unable to keep up with payments (or if you die before repaying the loan).

Lenders have two ways to collect under a collateral assignment arrangement:

• If you die, the lender gets a portion of the death benefit—up to your remaining loan balance.
• With permanent insurance policies, the lender can surrender your life insurance policy in order to access the cash value if you stop making payments.

Lenders are only entitled to the amount you owe, and are not generally named as beneficiaries on the policy. If your cash value or the death benefit exceeds your outstanding loan balance, the remaining money belongs to you or your beneficiaries.

Whenever lenders approve a loan, they can’t be certain that you’ll repay. Your credit history is an indicator, but sometimes lenders want additional security. Plus, surprises happen, and even those with the strongest credit profiles can die unexpectedly.

Assigning a life insurance policy as collateral gives lenders yet another way to secure their interests and can make approval easier for borrowers.

Types of Life Insurance Collateral

Life insurance falls into two broad categories: permanent insurance and term insurance . You can use both types of insurance for a collateral assignment, but lenders may prefer that you use permanent insurance.

• Permanent insurance : Permanent insurance, such as universal and whole life insurance, is lifelong insurance coverage that contains a cash value. If you default on the loan, lenders can surrender your policy and use that cash value to pay down the balance. If you die, the lender has a right to the death benefit, up to the amount you still owe.
• Term insurance : Term insurance provides a death benefit, but coverage is limited to a certain number of years (20 or 30, for example). Since there’s no cash value in these policies, they only protect your lender if you die before the debt is repaid. The duration of a term policy used as collateral needs to be at least as long as your loan term.

A Note on Annuities

You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes. In other words, the amount assigned will be taxed as income up to the amount of any gain in the contract, and may be subject to an additional 10% tax if you’re under 59 ½.

A collateral assignment is similar to a lien on your home . Somebody else has a financial interest in your property, but you keep ownership of it.

The Process

To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that’s the case, the policy owner, or “assignor,” submits a form to the insurance company to establish the arrangement. That form includes information about the lender, or “assignee,” and details about the lender’s and borrower’s rights.

Policy owners generally have control over policies. They may cancel or surrender coverage, change beneficiaries, or assign the contract as collateral. But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.

State laws typically require you to notify the insurer that you intend to pledge your insurance policy as collateral, and you must do so in writing. In practice, most insurers have specific forms that detail the terms of your assignment.

Some lenders might require you to get a new policy to secure a loan, but others allow you to add a collateral assignment to an existing policy. After submitting your form, it can take 24 to 48 hours for the assignment to go into effect.

Lenders Get Paid First

If you die and the policy pays a death benefit , the lender receives the amount you owe first. Your beneficiaries get any remaining funds once the lender is paid. In other words, your lender takes priority over your beneficiaries when you use this strategy. Be sure to consider the impact on your beneficiaries before you complete a collateral assignment.

After you repay your loan, your lender does not have any right to your life insurance policy, and you can request that the lender release the assignment. Your life insurance company should have a form for that. However, if a lender pays premiums to keep your policy in force, the lender may add those premium payments (plus interest) to your total debt—and collect that extra money.

There may be several other ways for you to get approved for a loan—with or without life insurance:

• Surrender a policy : If you have a cash value life insurance policy that you no longer need, you could potentially surrender the policy and use the cash value. Doing so might prevent the need to borrow, or you might borrow substantially less. However, surrendering a policy ends your coverage, meaning your beneficiaries will not get a death benefit. Also, you’ll likely owe taxes on any gains.
• Borrow from your policy : You may be able to borrow against the cash value in your permanent life insurance policy to get the funds you need. This approach could eliminate the need to work with a traditional lender, and creditworthiness would not be an issue. But borrowing can be risky, as any unpaid loan balance reduces the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could lapse, so it’s critical to monitor.
• Consider other solutions : You may have other options unrelated to a life insurance policy. For example, you could use the equity in your home as collateral for a loan, but you could lose your home in foreclosure if you can’t make the payments. A co-signer could also help you qualify, although the co-signer takes a significant risk by guaranteeing your loan.

Key Takeaways

• Life insurance can help you get approved for a loan when you use a collateral assignment.
• If you die, your lender receives the amount you owe, and your beneficiaries get any remaining death benefit.
• With permanent insurance, your lender can cash out your policy to pay down your loan balance.
• An annuity can be used as collateral for a loan but may not be a good idea because of tax consequences.
• Other strategies can help you get approved without putting your life insurance coverage at risk.

NYSBA. " Life Insurance and Annuity Contracts Within and Without Tax Qualified Retirement Plans and Life Insurance Trusts ." Accessed April 12, 2021.

IRS. " Publication 575 (2020), Pension and Annuity Income ." Accessed April 12, 2021.

Practical Law. " Security Interests: Life Insurance Policies ." Accessed April 12, 2021.

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What Is an Annuity?

Understanding annuities.

• Tax Treatment

The Bottom Line

• Retirement Planning

What Is an Annuity? Definition, Types, and Tax Treatment

These insurance contracts offer steady income but have some downsides

Daniel has 10+ years of experience reporting on investments and personal finance for outlets like AARP Bulletin and Exceptional magazine, in addition to being a column writer for Fatherly.

An annuity is a contract between a buyer and an insurance company that provides the buyer with a regular series of payments in return for a lump-sum payment. An annuity is most commonly used to establish a steady stream of income in retirement.

Various options for annuities may specify a set number of payments, a guaranteed payment for life, or payments for the life of a surviving spouse.

Key Takeaways

• Annuities are insurance contracts that provide regular income, immediately or in the future, in return for a lump-sum payment.
• A deferred annuity has an accumulation phase followed by a disbursement (annuitization) phase, while an immediate annuity converts a lump sum into cash flows from day one.
• Annuities come in three main varieties—fixed, variable, and indexed—each with its own level of risk and payout potential.
• The income from an annuity is typically taxed at regular income tax rates, not long-term capital gains rates, which are often lower.

Most buyers of annuities aim to create a steady stream of income as retirement income. They pay for the annuity either with a lump sum or with a series of payments over time.

In either case, the funds are invested and the proceeds accrue on a tax-deferred basis until they begin receiving payments. Like 401(k) contributions, funds in the account can only be withdrawn without penalty after age 59½. Unlike 401(k) contributions, the money paid into the annuity account is not shielded from income taxes.

Many aspects of an annuity are tailored to the specific needs of the buyer. An annuity that begins paying out immediately is referred to as an immediate annuity , while one that starts at a predetermined date in the future is called a deferred annuity .

The duration of the disbursements also is chosen by the buyer. You can choose to receive payments for a period of time, such as 25 years or for life. A couple can choose a payment that lasts for the life of the surviving spouse.

All of these decisions affect the amount of the payments, usually monthly, that the buyer will receive. In the case of a lifetime annuity, the payment amount also is determined by the buyer's life expectancy based on actuarial tables.

Fixed, Variable, or Indexed?

Annuities come in three main varieties: Fixed, variable, and indexed. Each type has its own level of risk and payout potential.

Fixed annuities pay out a guaranteed amount.

This type of annuity comes in two different styles—fixed immediate annuities, which pay a fixed rate right now, and fixed deferred annuities, which pay at a later date.

The downside of this predictability is a relatively modest annual return, generally slightly higher than the interest on a certificate of deposit (CD) from a bank.

Variable annuities provide an opportunity for a potentially higher return, accompanied by greater risk.

In this case, the buyer decides how the money will be invested, selecting from a menu of mutual funds that go into a personal "sub-account."

The payments are based on the performance of investments in the sub-account.

Indexed annuities fall somewhere in between the fixed and variable choices when it comes to risk and potential reward. The buyer receives a guaranteed minimum payout but a portion of the return is tied to the performance of a market index , such as the S&P 500 .

Despite their potential for greater earnings, variable and indexed annuities are often criticized for their relative complexity and the fees that are charged for them. For example, there can be steep surrender charges if the buyer chooses to withdraw their money within the first few years of the contract.

Variable and indexed annuities are often criticized for their complexity and high fees compared with other kinds of investments.

Tax Treatment of Annuities

An important feature to consider with any annuity is its tax treatment. While the balance grows on a tax-deferred basis, the disbursements you receive are subject to federal income tax.

The funds you receive are taxed at your regular income tax rates. By contrast, mutual funds that you hold for over a year are taxed at the long-term capital gains rate , which is generally lower.

Additionally, unlike a traditional 401(k) account, the money you contribute to an annuity doesn't reduce your taxable income.

For this reason, financial planning experts often recommend that you consider buying an annuity only after you've contributed the maximum to your pre-tax retirement accounts for the year.

Income generated from an annuity placed in a Roth IRA would not usually be subject to income tax.

Annuity Pros & Cons

Guaranteed income flows, sometimes for life

Customizable

May provide certain probate and creditor protections

Subject to withdrawal penalties and charges

May come with high sales charges or commissions

May generate taxable events

May be complicated to understand

Is an Annuity a Good Investment?

Annuities are best suited for individuals who want a steady, guaranteed retirement income and are willing to trade a large lump sum into a regular cash flow.

They are not generally designed for capital appreciation or even for capital retention. The buyer is giving up a sum of money in return for a certain flow of income.

If you're considering an annuity, look carefully at the fees involved . Some annuity providers have been criticized for charging high fees that dilute the value of the investment.

Who Should Not Buy an Annuity?

People who seek capital gains from their investment dollars would not benefit from owning an annuity. An annuity converts a dollar amount today into a guaranteed income in the future.

It's also important to consider the impact of signing away a substantial amount of cash. If it's needed in the future, the buyer of an annuity faces substantial withdrawal restrictions and penalties.

Can You Lose Money in an Annuity?

If you die before all the income from an annuity has been paid out, you could receive less than you paid in. This can be avoided by arranging a survivorship annuity or one that allows passing the value on to beneficiaries.

You also can lose to inflation if a fixed annuity's payments are not indexed to the Consumer Price Index or a similar cost of living measure.

An annuity offers one way of providing a predictable stream of income for retirement costs. Many options are available, and you need to consider them all before making a decision. You will be parting with a substantial amount of cash in return for a guaranteed income, for life or for an extended period of time.

If you decide to go for an annuity, compare providers . They differ in the types of annuities they sell and the fees they charge.

Internal Revenue Service. " Topic No. 410 Pensions and Annuities ."

Annuity.org. " Annuity Taxation ."

• Guide to Annuities: What They Are, Types, and How They Work 1 of 35
• What Is an Annuity? Definition, Types, and Tax Treatment 2 of 35
• The Main Types of Annuities Made Easy 3 of 35
• An Overview of Annuities 4 of 35
• Annuity vs. Life Insurance: What's the Difference? 5 of 35
• IRA vs. Annuity: What's the Difference? 6 of 35
• What Is the Best Age to Buy an Annuity? 7 of 35
• Deferred Annuity Definition, Types, How They Work 8 of 35
• What Is a Fixed Annuity? Uses in Investing, Pros, and Cons 9 of 35
• Immediate Payment Annuity: What it is, How it Works 10 of 35
• Indexed Annuity: Definition, How It Works, Yields, and Caps 11 of 35
• Individual Retirement Annuity: What it is, How it Works 12 of 35
• Joint and Survivor Annuity: Key Takeaways 13 of 35
• What Are Ordinary Annuities, and How Do They Work (With Example)? 14 of 35
• Qualified Longevity Annuity Contract (QLAC): Definition, Taxes, and Example 15 of 35
• Present Value of an Annuity: Meaning, Formula, and Example 16 of 35
• Future Value of an Annuity: What Is It, Formula, and Calculation 17 of 35
• Calculating Present and Future Value of Annuities 18 of 35
• Annuity Table: Overview, Examples, and Formulas 19 of 35
• Present Value Interest Factor of Annuity (PVIFA) Formula, Tables 20 of 35
• How Good of a Deal Is an Indexed Annuity? 21 of 35
• How Are Nonqualified Variable Annuities Taxed? 22 of 35
• How a Fixed Annuity Works After Retirement 23 of 35
• What Happens to My Annuity After I Die? 24 of 35
• How to Pick the Right Payout Option for Your Annuity 25 of 35
• Are Variable Annuities Subject to Required Minimum Distributions? 26 of 35
• How To Roll Over a Variable Annuity Into an IRA 27 of 35
• What Are the Distribution Options for an Inherited Annuity? 28 of 35
• Are There Penalties for Withdrawing Money From Annuities? 29 of 35
• Can I Borrow from My Annuity for a House Down Payment? 30 of 35
• How to Navigate Market Volatility While Saving for Retirement 31 of 35
• Variable Annuity: Definition, How It Works, and vs. Fixed Annuity 32 of 35
• Retirement Annuities: Know the Pros and Cons 33 of 35
• What Are the Biggest Disadvantages of Annuities? 34 of 35
• What Are the Risks of Annuities in a Recession? 35 of 35

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Annuities allow individuals to pay upfront or over time to receive a consistent income stream. Because they provide predictable income, annuities are a popular approach to securing retirement income. This is especially true as pensions have become less common in the private sector. Like most financial products, however, annuities have their share of benefits and drawbacks. Bankrate’s insurance editorial team can help walk through the complexities of this popular retirement account so you can determine if it’s right for you.

Key takeaways

• An annuity can help you save for retirement and has favorable tax benefits.
• Experts caution that annuities can be complex and risky, and that they can have high commission fees and may be difficult to cancel.
• Some alternatives to annuities include a traditional investment portfolio, managed payout fund or life insurance policy.

What is an annuity?

An annuity is a contract that provides someone a stream of income, typically in retirement, in exchange for money paid into the annuity. People often invest in annuities as part of their broader retirement strategy , including life insurance or traditional retirement accounts, like an IRA.

Insurance companies often offer annuities and construct the annuity to pay out on a predictable schedule. You may purchase an annuity by depositing a lump sum or by funding the contract over time with a series of premium payments.

The annuity will pay out over whatever period is specified in the contract. Perhaps that’s a fixed period, such as 20 years, or perhaps it’s for the remainder of the client’s life. So the annuity can offer the certainty of income and the possibility of never exhausting that income.

Types of annuities

Individuals can broadly lump annuities together into three different types:

• Fixed: A fixed annuity guarantees you a minimum rate of return on your investment and will pay out over a fixed term.
• Variable: A variable annuity allows you to put your money into various investments, often mutual funds. What the annuity returns and pays out to you depends on how the investments perform and the expense ratios on any funds you invest in.
• Indexed: An indexed annuity offers a rate of return that tracks an index such as the Standard & Poor’s 500 Index , which holds hundreds of America’s largest companies.

In addition to those three types, annuities can also be classified by when they pay out:

• Deferred annuities pay out at some specified time in the future, perhaps at some specific age in retirement.
• Immediate payment annuities begin within a year or less.

An annuity has two broad periods in its life — the accumulation phase and the annuitization, or payout phase. In the accumulation phase, you’re putting money into the annuity as a lump sum or over time. In the annuitization stage, you’re taking payouts from the annuity.

Money deposited into an annuity is locked up for a time called the surrender period. If you decide you want out of the annuity, you’ll pay a hefty fee called a surrender charge.

In the table below, you can see how the three main types of annuities compare based on critical benefits:

Features of an annuity

Annuities can be structured in many different ways, depending on a customer’s needs. Some may guarantee you’ll receive a specific dollar amount of payments from the account over some period. Many offer a death benefit, like life insurance , which may pay out on your passing.

One popular option is a longer surrender period, giving you more time to cancel. Some annuities may offer survivor’s benefits, where a spouse may continue to receive the annuity’s benefits over some time, and most annuities can be structured with other “riders” that offer some insurance-like benefit. Generally, the more riders your annuity has, the pricier it is.

So while the company issuing the contract has many different ways to create the annuity based on your needs, you’ll pay extra for all the benefits.

Tax advantages of an annuity

Annuities offer tax-deferred growth on your investment until you withdraw the money or begin receiving payments. So if you pay into the annuity with after-tax money, you’ll be taxed at withdrawal only on the earnings of the account, not any principal that you take out. This feature can be valuable for those looking for a tax-advantaged way to save for retirement.

Unlike other tax-deferred retirement accounts, such as a traditional 401(k) , annuities have no maximum annual contribution, allowing savers to pile away as much cash as possible. That’s a particular benefit for higher-income savers, who may otherwise want to contribute more to their retirement but have maxed out their ability to do so in a 401(k) or IRA.

You can also buy an annuity inside a Roth IRA or Roth 401(k) , making those payouts entirely tax-free. However, many experts frown on putting a complex tax-advantaged account inside another tax-advantaged account, such as a Roth IRA.

The downside of annuities

An annuity can solve the challenge of finding a guaranteed income stream in retirement and may offer some other benefits, such as a death benefit. However, it comes with several downsides, and many financial advisors may be suspicious of annuities for the following reasons.

Annuity contracts are tremendously complex, often totalling dozens of pages. In this fine print, you’ll find all the many conditions of the annuity spelled out, such as when you can get paid, how much it will cost you to cancel the contract, the guaranteed payment, what rate of return the annuity is based on, and all the other details that govern the agreement.

On top of this complexity, annuity contracts may differ markedly from one to the next. Annuities have some broad similarities, but the details are where annuities stand apart. The benefits of each annuity contract may differ – allowing insurance companies to offer a specific kind of coverage that you’re looking for and hide some of the less flattering details of the contract.

It ought to go without saying, but you’ll need to read the contract closely to understand your rights and responsibilities. But even spending hours on the contract may not be enough.

Huge sales commissions

One of the most significant drawbacks of an annuity is the large sales commission baked into the product. While you may not pay the commission directly, it still reduces the returns you otherwise could have earned.

Unfortunately, it’s not unusual to spot a commission at six or seven percent, though they may go up to 10 percent. If you put $100,000 into an annuity, a salesperson may take $6,000 or more, though the insurance company may obscure how you’re charged.

Complex annuities with more features generally have higher commissions than simple annuities. An annuity with an extended surrender charge period means higher commissions, too.

With that kind of incentive, it’s little wonder that insurance agents are eager to sign up clients in a complex product. It’s also a reason why you may want to consider getting a second opinion from an independent fee-only financial advisor who’s looking out for your interest.

Can be hard to cancel

Amid all the complexity of the contract, you may find how to cancel your annuity, a process that usually carries substantial fees – called surrender charges. Surrender charges typically last six to eight years after signing the annuity contract, and tend to decrease over time. While there may be ways for you to wiggle out of the contract, don’t expect them to be easy or free.

Illiquid money

Once you put your money into an annuity, it’s generally tied up for an extended period. You’ll receive your income stream, and may be able to withdraw some of the principal, but for the most part, your money is locked into the annuity and you have relatively little access to it.

That can be problematic if you need money for an emergency and your income or other savings don’t suffice.

 Can be risky

Because they may rely entirely on the markets for any gain, variable annuities can potentially be quite risky, leaving you with few gains and maybe even losses after years of saving. You’ll want to invest any money for the long term to ride through the dips in the market and avoid fees that may come with an early redemption of the annuity if you decide to go that route.

Variable annuities can also be full of fees – a mortality and expense risk charge, the expense ratios of any funds you invest in, administrative fees and any additional fees for special riders you’ve added to the account (for example, a death benefit or guaranteed minimum payout.)

And suppose you withdraw your money early, before age 59 1/2. In that case, you can get hit with a 10 percent bonus penalty from the IRS in addition to taxes you’ll owe on any investment gains, much like the penalties for early withdrawals from traditional IRA and 401(k) accounts.

Alternatives to annuities

So many kinds of annuities exist because consumers have varying needs. But ultimately, annuities aren’t suitable for everyone. Here are some alternatives to annuities:

• Investment portfolio: Strategic investments can help provide extra income during retirement. For example, while an annuity may promise you a 4 percent return on your money, a financial advisor may be able to construct a portfolio that earns you five percent today and offers a growing stream of dividends in future years. Or you could use a robo-advisor to create a balanced portfolio for you at a fraction of the cost.
• Managed payout fund: A managed payout fund is similar to an annuity, but there is no guaranteed rate of return on your money. Managed payout funds are a type of mutual fund that can yield anywhere from 1 percent to 8 percent growth.
• Life insurance policy: Certain types of life insurance can provide income replacement during retirement, usually through riders. Life insurance policies also have a death benefit that your loved ones can access after you pass away.

Frequently asked questions

What are the benefits of purchasing an annuity, are annuities different from insurance, what is a surrender period, bottom line.

Annuities can be a good decision for the right person at the right time, but they come with substantial downsides that you should understand before signing a contract. Despite their drawbacks, annuities remain a popular way to save for retirement, especially for high income earners and those looking for a way to guarantee a series of pension-like payments later in life.

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Assignment Of Annuity Contract For Consolidation Is Tax-Free Exchange.

Rev. rul. 2002-75; 2002-2 c.b. 812.

• Institutional Authors Internal Revenue Service
• Code Sections Section 1035 Section 72
• Subject Area/Tax Topics Insurance
• Industry Groups Insurance
• Jurisdictions United States
• Language English
• Tax Analysts Document Number Doc 2002-25168 (1 original page)
• Tax Analysts Electronic Citation 2002 TNT 218-80

Rev. Rul. 2002-75

[1] Is the taxpayer's assignment of an entire annuity contract to a second insurance company, which then deposits the cash surrender value of the assigned annuity contract into a pre-existing annuity contract owned by the same taxpayer, and issued by the second insurance company, a tax-free exchange under § 1035? What is the basis under § 1035 and the investment in the surviving contract under § 72 after the transfer?

[2] A owns Contract B, an annuity contract issued by Company B, and Contract C, an annuity contract issued by Company C. A is the obligee for both contracts. A seeks to consolidate Contract B and Contract C. A assigns Contract B to Company C. Company B transfers the entire cash surrender value of Contract B directly to Company C. Company C includes the transferred cash surrender value of Contract B in Contract C. A will not receive any of the cash surrender value of Contract B that is transferred to Company C and deposited into Contract C. No other consideration will be paid by A in this transaction. The terms of Contract C are unchanged by this transaction, and Contract B terminates.

LAW AND ANALYSIS

[3] Section 1035(a)(3) provides that no gain or loss shall be recognized on the exchange of an annuity contract for an annuity contract. Section 1.1035-1 of the Income Tax Regulations provides that the exchange, without recognition of gain or loss, of an annuity contract for another annuity contract under § 1035(a)(3) is limited to cases where the same person or persons are the obligee or obligees under the contract received in the exchange as under the original contract.

[4] The legislative history of § 1035 states that exchange treatment is appropriate for "individuals who have merely exchanged one insurance policy for another better suited to their needs and who have not actually realized gain." H.R. Rep. No. 1337, 83d Cong., 2d Sess. 81 (1954).

[5] Section 1035(d)(2) cross-references § 1031 for the rules to determine the basis of property acquired in a § 1035 exchange. Section 1031(d) provides that property acquired in a § 1035 exchange has the same basis as that of the property exchanged, decreased by the amount of any money received by the taxpayer and increased by any gain (or decreased by any loss) recognized by the taxpayer on the exchange.

[6] Section 1.1031(d)-1 provides, in part, that in a § 1035 exchange the basis of the property acquired is the same as the basis of the property transferred by the taxpayer with proper adjustments to the date of the exchange.

[7] Section 72 governs the federal tax treatment of distributions from an annuity contract. For purposes of determining income, gain, or loss from an annuity contract, § 72 contains two special definitions of investment in the contract. When amounts received are not annuity payments, § 72(e)(6) defines the investment in the contract. For purposes of § 72(b), which applies to annuity payments, § 72(c)(1) defines the investment in the contract in a similar, but not identical, manner.

[8] After completion of the transaction, A owns only Contract C, which has been increased in value to reflect the cash surrender value transferred into it from Contract B. A had no access to the cash surrender value transferred in the exchange. Therefore, this transaction is treated as an exchange that is tax-free under § 1035.

[9] As a result of the application of § 1035(d), A's basis in Contract B is included in A's basis in Contract C immediately after the exchange, and under § 72(c)(1) and § 72(e)(6), A's investment in Contract B is included in A's investment in Contract C immediately after the exchange.

[10] (1) The assignment by A of Contract B to Company C for consolidation with pre-existing Contract C is a tax-free exchange under § 1035.

[11] (2) After the assignment, pursuant to § 1035, A's basis in Contract C immediately after the exchange equals the sum of A's basis in Contract B and A's basis in Contract C immediately prior to the exchange.

[12] (3) After the assignment, A's investment in Contract C under § 72 equals the sum of A's investment in Contract B and A's investment in Contract C immediately prior to the exchange.

DRAFTING INFORMATION

[13] The principal author of this revenue ruling is Ann H. Logan of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact her at (202) 622-3970 (not a toll-free call).

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How Much Does an Annuity Cost?

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Annuities are complex financial products, and it’s important to understand all the ins and outs before purchasing one. Here’s what you need to know about how much annuities cost.

What Is an Annuity?

An annuity is a contract between an insurance company and an individual. The individual pays the insurance company a sum of money, either all at once or in periodic payments, and the insurance company promises to provide a series of payments to the individual, often for the rest of their life.

Annuities are often marketed as retirement savings vehicles , and they can be useful. But they can also be expensive compared to other options, so it’s important to understand all the costs associated with this type of investment.

Annuities have several different kinds of costs, which can lead to some confusion. Here’s a breakdown of the most common costs and what they entail.

The annuity company pays the salesperson a commission on the sale of the annuity. This is a percentage of the premium that the individual pays for the contract, and it can be a lump sum at the time of the sale, or a “trail” over the first several years of the contract.

Everyone should get paid for their work, and annuity salespeople are no different. But it’s important to remember that anyone trying to sell you an annuity will get paid a significant sum to do so. This is particularly important to keep in mind if someone suggests you move the money from an existing annuity into a new contract.

Expense Ratios

Variable annuities invest in mutual funds, and mutual funds have fees. These fees are passed on to the annuity owner in the form of expense ratios.

Mortality and Expense Charges

An annuity is an insurance contract, so the company charges a fee to provide a death benefit. The death benefit is in effect during the accumulation phase of the contract, that is, prior to annuitization.

Optional Features

Many annuities have options, or riders, you can purchase at additional cost. These costs are usually a percentage of the annuity value and may be assessed annually. For example, many variable annuities have guaranteed withdrawal benefits, which provide for a minimum amount you can withdraw from the contract, regardless of market performance.

A guaranteed death benefit is another optional feature. In most cases, when you begin taking payments from an annuity contract, you annuitize it, which means turning the contract value into an income stream. Once you annuitize, there is no longer a death benefit, so if you receive three payments and then die, that’s all you get — your heirs get nothing. Some contracts allow you to purchase a minimum amount your heirs will get.

Surrender Charges

This can be the most expensive fee for an annuity, but it’s also the one that’s the easiest to avoid. An annuity is meant to be a long-term investment, so annuity companies will charge you for taking your money out early. A surrender charge may be as much as 7% or 8% of the contract value in the first year and then declines, usually by one percent per year until, at year seven or eight, it is zero. You can avoid this charge by not withdrawing your money, at least until the surrender period ends.

Key Takeaways

These fees can add up to as much as 3% or more per year in a variable annuity contract — excluding the surrender charges. Be sure you factor this in when comparing an annuity to another option for your retirement investment.

• The monthly payout from a $100,000 annuity ranges, anywhere from $400 to $700, depending on multiple factors like the type of annuity, your age at the beginning of payouts and interest rates .
• The average cost of annuity fees can go up to 3% or more depending on the type of annuity and the number of riders.
• An annuity can be a good investment for those seeking stable returns in retirement but you should consider all the fees and lack of liquidity before committing to make sure it aligns with your long-term goals.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy .

• U.S. Securities and Exchange Commission. 2018. "Updated Investor Bulletin: Variable Annuities."
• Office of the Insurance Commissioner. "How much do annuities cost?"
• Forbes. 2020. "What Are The Fees Associated With The Variable Annuity?"

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Glossary of Terms

• Annuitant: the individual on whose life the annuity is purchased. Also known as the claimant, plaintiff, measuring life, employee, releasor, or injured party.
• Annuity: a contract issued by a life insurance company funding the fixed, periodic payments an individual will receive for either a lifetime or a certain period of time.
• Assignee: the third-party company, usually affiliated with a life insurance company that accepts assignment from the defendant or its liability insurer of the obligation to make the periodic payments outlined in the settlement and acts as owner of the annuity contract, in accordance with Section 130(c). Also called “Assignment Company”.
• Assignment Agreement : a legal document which transfers the obligation to make the periodic payments from the defendant’s liability insurance carrier or self-insured defendant (assignor) to a third party (assignee). The most commonly used and/or accepted are the Uniform Qualified Assignment (UQA) and Non-Qualified Assignment Agreement and Release (NQAR).
• Assignor: the defendant or liability insurance carrier that is originally responsible for the periodic payments under the settlement agreement, which assigns the obligation to make the periodic payments to the Assignee.
• Claim: facts that combine to give rise to a legally enforceable right or judicial action.
• Claimant: a person with a claim in a lawsuit. Also called plaintiff, employee, or releasee.
• Claims Adjuster: the individual who works for the defendant’s liability insurance company, a risk management pool, an “adjusting company,” or for the defendant itself and works with defense counsel to settle the claim. 
• Constructive Receipt/Economic Benefit Doctrine : income not in the taxpayer's possession but credited to their account, set apart for them or otherwise made available for them to draw upon. For example, if the plaintiff attorney has the settlement proceeds in his/her IOLTA account, the plaintiff is in constructive receipt of the settlement.
• Defendant: a person or entity being sued or against whom a claim is made. Also called respondent, insured or employer.
• Defense Attorney: the attorney who represents the defendant/employer/respondent and insurance carrier. 
• Guardian: a guardian of the claimant is responsible for the personal welfare of the individual. This can include the person’s living arrangements, medical care, education, and so forth. A Guardian of the Estate is responsible for the case and management of the individual’s property. Under normal circumstances, parents perform these roles for their minor children, in the role of “parent and natural guardian.” If payments are going to be made to a parent for the benefit of a child prior to the child’s 18th birthday, then the life insurance companies may require a copy of the court documents appointing a Guardian of the Estate of that child. A Guardian ad Litem is an attorney who solely represents the interest of a minor child or incompetent adult.
• Insurance Carrier:  a company that provides insurance on behalf of the defendant. Also called, casualty company, or excess carrier.
• Life Only Annuity:  an annuity that pays for the life of the annuitant only. Payments cease at death of the annuitant.
• Life Annuity, with Period Certain: a life annuity in which a certain number of payments will be paid whether or not the measuring life survives the entire payment schedule.
• Plaintiff: the person who initiates a lawsuit against a person or entity. Also called annuitant, claimant, or employee.
• Plaintiff Attorney : the attorney who represents the plaintiff/claimant during a legal settlement.
• Periodic Payment Act of 1982 : brought various tax rulings into statutory certainty and added Section 130 to the Internal Revenue Code, thus authorizing qualified assignments. Also known as Public Law 97-473.
• Physical Injury: an injury to a person's physical body, i.e. loss of limb, brain damage, dog bite, or bruising. These types of cases can be assigned under Section 130 and fall under Section 104(a) of the Tax Code.
• Quote:  a written proposal showing a specific benefit type, amount, cost, expiration date, and underwriting company. Also called a proposal.
• Section 104(a)(1):  section of the U.S. Tax Code which describes amounts received under Workersʼ Compensation acts as compensation for personal injuries or sickness suffered in the workplace. 
• Section 104(a)(2):  section of the U.S. Tax Code which describes the amount of any damages (other than punitive damages) received on account of personal physical injuries or physical sickness. 
• Section 130(c):  the Internal Revenue Code that describes and allows for the assignment of periodic payments to a third-party assignee. 
• Settlement Agreement and Release : a legal document executed by all parties of a lawsuit or claim stating the terms by which the plaintiff releases the defendant and/or their insurance carrier. The payments to be made by the defendant/insurance carrier, the purchase of the structured settlement, and consent language for the assignment may also appear within the document.
• Structured Settlement:  a legal settlement paid out as periodic payments rather than (or in addition to) a cash lump sum, usually with certain tax advantages for the claimant/plaintiff.
• Structured Settlement Consultant: a person who is an expert in structured settlements. He/She is licensed to sell insurance in the states where he/she practices and is appointed by the life insurance companies to specifically sell structured settlements.
• Term, or Period, Certain Annuity:  an annuity that pays out for a set amount of time. Should the annuitant die before the payments are scheduled to cease, then the remaining payments will be paid to a named beneficiary or to the annuitant’s estate if no beneficiary is listed.

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