Fair Market Value of Annuities: Explained
- coreincomemarketing
- Oct 7
- 6 min read
Fair market value (FMV) is a foundational concept in financial planning, but when it comes to annuities, it’s often misunderstood by even the most experienced advisors.
The FMV of annuities refers to the actuarial present value (APV) of the remaining benefits the contract is expected to provide.
In simpler terms, it’s an estimate of what the entire interest of the annuity is worth today, which might be higher than the accumulation value.
It’s critical for advisors to understand FMV since insurance companies are required to report it annually to the IRS (either on Form 5498 or the 12/31 year-end value letter), which most often impacts Roth conversions and Required Minimum Distribution (RMD) calculations. This was initiated by the IRS in the early 2000s and again revisited in 2025 as part of the SECURE Act 2.0.
If advisors don’t realize how FMV differs from what’s shown on an annuity statement, it could lead to calculation errors for advisors and inaccurate communication with clients.
In this article, we'll break down:
What is Fair Market Value?
As a financial concept, FMV is the price a willing buyer would pay a willing seller in a free market.
A simple way to understand FMV is by looking at stocks. When you buy a publicly traded stock, its listed market price represents its FMV.
Fair market value plays a role in determining the “performance lock” of Registered Index-Linked Annuities (RILAs) prior to the end of the index term. This value isn’t based solely on index growth; it also reflects the value of the “options” within the annuity. These options are priced using models like Black-Scholes, which factor in not just index performance, but also market volatility, risk-free rate, and time to expiration.
But when it comes to traditional annuities, FMV can be more complex.
How FMV Applies to Annuities
Annuities are different from regular investment accounts because they often include additional guaranteed benefits (like lifetime income or enhanced death benefits) that add potential value beyond just the dollar amount you see in the account value.
The FMV for most IRAs, like a brokerage account, are simple: it is the account value. There are no additional contingent benefits beyond the liquid asset you hold.
For example, if you had an IRA invested in $100,000 worth of stocks, the account value and FMV are the same: you’d have $100,000 to use.
On the other hand, annuities with future guaranteed benefits do carry additional contingent value beyond the base account balance in the FMV.
FMV = accumulation value + actuarial present value of additional income and death benefits
If you had $100,000 in an annuity with guaranteed lifetime income or an enhanced death benefit, the IRS may value it higher than $100,000, since there is reasonable actuarial probability that you will receive more than that account value over time.
Actuarial Present Value Calculation
The additional APV is a calculation using actuarial techniques that discount the Probability of an event occurring, the Amount paid given that event, and the Timing of that event.
That iterative discount calculation to today includes prescribed yield curves, as well as standardized actuarial mortality tables, which factor in the annuitant’s age, gender, and life expectancy.
If the net present value of additional benefits (future income benefits and death benefits) is worth more than the account value, that amount would need to be added to the account value to determine the FMV of that annuity.
Client Example: Why Roth Conversion Values Don't Always Match
An advisor recently came to us with a common, and confusing, question:
“My client requested a $50,000 Roth IRA conversion from their annuity, but I got a tax bill for $60,000, what happened?”
At first glance, it looks like something went wrong. But what actually happened comes down to how the IRS requires the FMV of annuities to be reported.
Let’s walk through the numbers:
When the insurance company reported this Roth conversion to the IRS, they didn’t base it solely on the annuity’s accumulation value (what’s visible in the account).
Here’s what the values looked like at the time of conversion:
$500K = accumulation value
$900K = death benefit value
$600K = IRS fair market value (due to enhanced death benefit)
The advisor asked to do a partial conversion of 10% of the account value.
And this is where the confusion began: the request for 10% of the account value may produce different results based on the higher calculated FMV.
Here’s how that percentage broke down across the contract:
$50,000 of the accumulation value became Roth (10% of the original $500k value)
$90,000 of the death benefit value became Roth (10% of the original $900k value)
Yet $60,000 is the amount reported to the IRS as taxable income (10% of the $600k FMV)
So, although it looks like only $50k was reclassified, the IRS sees it as a $60k conversion, and that is the amount that taxes are based on.
While insurance companies typically note that FMV will be used for Roth conversions in the paperwork, it's easy to miss. That’s why, at Core, we make sure you’re aware of it, ensuring you and your clients aren’t caught off guard.
Client Example: RMD Calculations
In 2025, the IRS issued additional guidance on the SECURE Act 2.0 (originally passed in 2022) regarding how the FMV of annuities should be treated for RMD purposes.
Similar to how the IRS uses APV during a Roth conversion, the APV is also applied when calculating RMDs. If the future value of guaranteed income or death benefits exceeds the current account value, the higher amount must be used in the RMD calculation.
It’s generally understood that RMDs can be aggregated across all IRA accounts. And with today’s higher guaranteed lifetime income payments from guaranteed lifetime withdrawal benefits (GLWBs) on deferred fixed, indexed, or variable annuities, those payments might be sufficient to satisfy the RMD not only for that annuity but also for additional IRA assets in other accounts.
Before the IRS issued updated guidance in 2025, the rules stated that once an annuity’s account value reached zero, you can no longer aggregate RMDs. In that case, the income received from the annuity only satisfies the RMD for that specific contract, since there’s no longer an account value to base aggregation on.
However, in its 2025 guidance, the IRS expanded the use of the APV methodology to include annuities that no longer have an account value. This is especially relevant for Single Premium Immediate Annuities (SPIAs) and GLWB payments made after the account value has reached zero.
Insurance carriers are required to calculate and report the APV for these contracts directly to the IRS. And now, this reported APV can now be used to aggregate RMDs across other IRA accounts, even when the underlying annuity account value is fully depleted.
Client Example
A client has owned an immediate annuity since 2015, which pays $5,000 annually for life and has no account value.
Under prior IRS rules, that $5,000 was considered the full RMD for that annuity alone and could not be aggregated with other IRA accounts.
However, under the 2025 IRS guidance, the APV of the future income and death benefits is now calculated to be $70,000. If the client’s RMD factor based on their age is ~4.54%, the RMD for this annuity would be $3,181 ($70,000 x 4.54%).
Because the annuity is paying $5,000, the client is now exceeding the RMD for this contract by $1,819 ($5,000 – $3,181). Under the new rules, this excess amount can be used to satisfy the RMDs from other IRA assets. At the same RMD factor (4.54%), this surplus would cover the RMD for an additional $40,000 in IRA assets ($1,819 / 4.54%).
This change can be especially beneficial for clients who want to minimize account depletion and manage the tax impact of their RMDs more effectively.
How Core Income Helps You Navigate FMV of Annuities
Understanding the FMV of an annuity can create both planning opportunities and potential pitfalls.
At Core, we help advisors understand FMV so they know when to review insurance company valuations before planning Roth conversions or RMDs.
We encourage you to reach out to our team to ensure you’re working with accurate assumptions and guiding your clients with clarity.
800-541-7713
If you’d like to review the IRS guidance on FMV reporting, you can view the publication here.
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Our mission is to help advisors deliver financial certainty by supporting them through actuarial precision, elite responsiveness, and collaborative partnerships.
To learn more about how we can support you, schedule a consultation with our team or call us at 800.541.7713.
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