Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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How does a split annuity work?

A split annuity allows the investor to divide their investment to secure the immediate future while rebuilding the deferred amount to the original investment. There are two ways to receive the invested amount of an annuity.

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You can take the money immediately or defer the investment to be paid in incremental payments during the payout phase of an annuity. The split annuity allows the investor to utilize both ways.

Let’s say you are an investor who has $50,000 to work with, and you intend to purchase a split annuity; you would actually generate two agreements. They combines the best of immediate and deferred annuities.

  • The first agreement determines the terms of the immediate annuity
  • The second establishes the terms of the deferred

They both also establish the annuitant and beneficiary should anything happen to the annuitant.

Which annuity works best for you?

The various annuity options are designed to meet the different needs people have. Retirement is actually not the only reason people purchase an annuity. Some people invest in this financial vehicle to pay for college. A split annuity is an excellent choice in this case because the owner can divide the investment and receive an immediate payout for a child’s college education, and set up a deferred payout for retirement.

A variable split annuity may also be an option. Part of the investment may be established as a fixed while the deferred part may be invested as a variable option. This way, not only will the original return be earned, but interest may be earned in the marketplace as well.

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May I use my annuity in an emergency?

Some people prefer a more complex annuity like a split for the flexibility it offers in an emergency. As opposed to dipping into a fixed or variable annuity and risk the prospect of paying capital gains tax, a split will liquidate funds with the immediate payout. Whether the second portion is invested or used for simple interest, the first can be set aside or invested in something that could be liquidated without penalties.

What are single premium immediate and deferred annuities?

With the single premium immediate annuity and deferred annuity, the best of both annuity worlds are possible. The indexing of annuities works to reap the benefits of increased value and interest. If an annuity earns 6% at the beginning of the investment, and interest rates increase on annuities by the end of the first year, the owner receives the benefit of the increased rate. Even if the market takes a fall, the guaranteed interest will protect your investment.

The difference between the starting index and periodic ending index is determined by the participation rate from one date point to another. The participation rate is paid based on the exclusion ratio. The interest increase has its own caps and limitations just like the guaranteed minimum. So the split annuity gets the benefit of two interest earnings.

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What are the tax benefits of an annuity?

The tax benefits of annuities are one reason this is a popular investment. The immediate annuity has a higher percentage of tax shelter since it is a part of the original investment. Taxes are paid on the taxable part of withdrawals made against the annuity account. This is why several smaller withdrawals are normally made at a time during this phase. Transfers through the 1035 tax exchange methods save on taxes as well.

The benefit of the split annuity is the flexibility it offers to avoid too many withdrawals while receiving a higher percentage of the original investment, tax free. Not only is there a tax savings due to limited withdrawal, but the liquidity of the immediate annuity payout allows the original investment to accumulate without unnecessary penalties and fees.

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What mistakes do people make with their split annuitites?

In order to get the most out of your split annuity there are some mistakes to avoid. A few of those mistakes are:

  • Purchasing the wrong type of annuity, especially when it comes to variable options
  • Not designating a back up beneficiary
  • Having a young annuitant that could be subject to surrender penalties
  • Making the annuity part of your estate
  • Not taking advantage of 1035 tax free exchanges

This is a partial list of the mistakes owners make. The chances of your annuity reverting back to the insurance company are great when there is no back up beneficiary. Because beneficiaries are required to cash out within five years, the sudden death of the annuitant could cost the beneficiary surrender fees for early withdrawal.

Making your annuity part of your estate may backfire. One of the benefits of having an annuity is the fact that it is not subject to probate. Upon the annuitant’s death the annuity goes straight to the beneficiary, but if it is a part of the estate, the beneficiary has to wait and is taxed at a higher rate based on other estate assets.

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