A few readers asked me to make further comments regarding the particular deferred income annuity (DIA) marital property case involving an IRA DIA contract highlighted in the LifehealthPro article I authored last year in April 2014 when DIAs feature adjustable start dates. Most DIA (IRAs and non-qualified) contracts feature adjustable start dates that can, upon the owner’s request, be advanced or delayed up to five years from the issued contract’s initial payment commencement date.
The case last year featured a divorcing male, age 55 and a female spouse, age 35 with a joint and 100% survivor IRA DIA paying a monthly lifetime income of $1,000 commencing at the male’s age 65. The premium purchase is 100% marital funds. Last year, at the time of writing, the male’s lifetime annuity value was $103,000 and the female’s survivor benefit value was $53,400 for a total annuity value of $156,400 ($103,000 + $53,400).
If the above contract has an adjustable start date (incorporating a period certain or refund feature), the start date variability needs to be considered when determining annuity value. This is because it is incumbent on the annuity owner to maximize the marital property value regardless of when he actually intends to take the income. If the contract has a greater value to the IRA holder at his age 60, the maximum reduced starting age per the contract in this case, that’s the value he has to use to determine the marital value.
The carrier will attempt to adjust the initial payment to such a degree that it is “actuarial neutral” for their purposes. However, when the annuity is valued for division purposes it always valued relative to the individuals(s) who benefit from the contract and not from the carrier’s perspective. To attempt to make an “actuarial neutral” adjustment, carriers rely on the formulas stated in their contracts. The formulas typically incorporate the annuity 2000 table (for mortality base payments) and an interest rate tied to the Moody’s Baa Corporate Bond Yield (Moody’s Rate) adjusted with a “fudge factor” of 1.50%. If payments are advanced, 1.50% is added to the Mood’s Rate and this creates a higher overall discount rate that further reduces advanced annuity payments. If payments are delayed then, 1.50% is subtracted from the Moody’s Rate this decreases delayed annuity payments vs. if the entire unreduced Moody’s interest rate was utilized. One carrier I evaluated actually slips in the new annuity 2012 table elongating mortality and would therefore provide for even lower advanced or delayed payments vs. the carriers using the annuity 2000 table for the exact same annuity and payment circumstances.
The net result is; if the adjusted annuity payments at the IRA owner’s age 60 produces a greater total value of say $160,000 for both the husband’s lifetime annuity and her survivor benefits then, that’s the value they will have to use for divorce purposes at his age 55.
On the other hand, after the contract issue date, let’s say there was a significant change in the health status of either the IRA Owner (husband) or the joint Annuitant Spouse prior to the date of divorce. This also affects the valuation. If the IRA Owner husband becomes injured; paraplegia, traumatic brain injury, significant burns, etc. or contracts an illness like HIV, cancer, heart damage, hepatitis C, etc. , the value of his lifetime income at divorce could be close to $0. In fact, this is one reason carriers limit the time period you can advance the payments to reduce the effects of adverse selection due to adverse annuitant health changes.
After such a health change event, the husbands’ lifetime annuity value may be $0 because he may not be able to make it to age 60 and the survivor benefit (assuming female is still standard health) value rises tremendously and is worth $160,000. In this case, he keeps all the annuity income (if he survives to collect it!) and she would be required to shift other marital property assets totaling $160,000 to him because she irrevocably collects all the survivor benefit. If this was the case, husband gets his $160,000 now (age 55) and wife has to wait until at least to his age 60, her age 40, to begin to collect her $1,000 monthly survivor benefit, of course assuming he dies prior to age 60.
If the female spouse joint survivor annuitant experiences a negative health change and the annuitant owner remains at standard health, it could be that her survivor annuity has little value causing her to have a greater share in his $1,000 monthly annuity payment, potentially up to 50% (again, assuming an equal division). In this case, she might compel him to take annuity income five years earlier than he wanted, at age 60 vs. age 65, so she has some shot at getting something of the reduced age 60 payment. Of course, per the contract she has to wait these five years.
If annuitant health changes occur during the post-marital period and after the division process then, both parties have to live with their annuity contract division decisions. Possible adverse heath changes are an element of risk both divorcing parties need to weigh when dividing life contingent DIAs.
In fact, if indeed a spouse experienced a negative health change during the marriage, this might have been the catalyst to the divorce action in the first place. National statistics indicate when a spouse becomes permanently injured or chronically ill, the prospect of a divorce rises dramatically. And these particular annuities, unlike other financial products, are really built to protect both parties from dissipating their retirement assets by delivering income when it’s needed. Always Keep Your Hands Up!