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Annuity Loans: The Complete Guide

Annuity Loans: The Complete Guide

Annuity loans allow the owner of an annuity to borrow against the cash value held by their annuity contract.  This is a great, tax-deferred way to take out a loan at a low interest rate.  Annuity loans are only available under certain circumstances, and of course you will need to have some cash accumulated in the annuity account in order to take out a loan in the first place.  If you do qualify, however, you can use annuity loans for a wide variety of purposes.

An annuity is similar to a life insurance policy except that the purchaser expects to have the loan pay out during their lifetime.  Much like a life insurance policy, you pay a certain amount every month to an insurance company, and that amount is levied against the final amount of the annuity contract.  At the age of retirement, the annuity will begin to pay out in monthly installments.  This form of retirement savings is very popular because it is tax-deferred, and also because of the availability of annuity loans, which allow you to access the money held in the annuity ahead of time and pay it back into the annuity so that you will still have the money available at retirement age.

Annuity loans are generally relatively low in interest, and you may have several years to pay back the balance to your insurance company.  There is no restriction on what you can use the money for; it can be to help pay for a child’s college or to take care of some renovations on your home.  There are almost always restrictions on the amount of money you can borrow, however.  Sometimes you can take out annuity loans up to 50% of the annuity value.  How much you can get on your loan will depend on the particular terms of the annuity itself, based on the insurance company’s regulations.

There is a process to applying for annuity loans that may differ from company to company.  Whether or not a loan is even available to you is determined by the terms of your contract.  If you do qualify, you will need to fill out an application and wait on the decision of the insurance company.  Once the loan is approved, you will need to sign a contract agreeing on the interest rate as well as the time period over which you will pay the money back into your annuity.  

Annuity loans are tax deferred, which means that you can access the money in your annuity without paying the early surrender charges or early distribution charges that would apply if you were to cash out the policy.  An annuity allows you to save money without paying taxes on it, but if you surrender it and take out the money before retirement age, you will be subject to penalties such as a surrender charge.  You will also have to pay the deferred taxes and any other fees that are applicable.  Annuity loans allow you to avoid these fees and still use the money for immediate needs.  If you fail to pay the loan back on time, however, these fees and charges will likely apply to the loan.

Annuity loans are usually much easier to get than unsecured loans, so they are a great way to pay for items for which you would not normally be able to get a loan.  While unsecured loans usually come with high interest rates or can be very hard to qualify for, annuity loans are easy to get as long as you have an annuity in place from which a loan is available.  As long as you pay them back on time, there will be no impact on the annuity itself come retirement.

If you already have an annuity, talk to your insurance agent or company regarding how to go about taking out a loan.  They should be able to walk you through the process and thoroughly explain the terms of annuity loans through your company to you so that there will be no surprises.  If you don’t have an annuity, you will need to purchase one and pay into it for some time before annuity loans are available to you.  It is a great way to save for your retirement and have some money to fall back on in times of need.

Photo courtesy of J.L. Trinh.

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