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 percent survivor IRA DIA paying a monthly lifetime income of $1,000 commencing at the male’s age 65. The premium purchase is 100 percent 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 percent. If payments are advanced, 1.50 percent 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 percent 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.