Identification

• An income annuity is an insurance policy that converts a savings to monthly payments. The monthly payments constitute mostly a return of your investment principal along with a small amount of interest income. The interest credited to the payments you receive is based on the investments in the insurance company's general account, which is invested in bonds and bond-like instruments that generate income for the insurer. Your interest constitutes a share of the insurer's income.
  
  

Regulation

• As an insurance policy, your annuity is regulated at the state level with the rules and regulations for the design and sale of policies set by your state's insurance commissioner. Because of this, the laws governing annuities in one state will differ from those of another state. Likewise, laws concerning bankruptcy vary according to state. So there is no "across the board" answer to how an annuity would be treated in bankruptcy.
  
  

Benefit

• Some states, like Florida, exempt all annuity proceeds from bankruptcy. Some states, like Idaho, exempt part of the proceeds of an annuity. Still other states, like Colorado, protect none of your annuity proceeds. If you happen to live in a state that exempts annuities from creditors, you will keep all of your annuity payments, regardless of the creditor's claims against you.
  
  

Consideration

• Pension plans use annuities to distribute payments. However, annuities are not pensions, as such. When you file for bankruptcy, you cannot treat an annuity as a pension. If you do have any pension plan payments, these payments are protected under the federal Employee Retirement Income Security Act (ERISA) laws that wholly exempt pensions from bankruptcy no matter where you live.