What is an annuity loan?
An annuity loan is a financial arrangement in which you leverage your annuity to get a loan. You can do this by using your annuity as collateral to get a loan from a bank, or by borrowing money directly from your contract.
An annuity is a contract between you and an insurance company. You’ll purchase the annuity with premiums, and in exchange, the insurer will pay you a stream of income, often for the rest of your life. While using your annuity to get a loan isn’t its primary function, it’s a benefit many annuities offer.
Getting an annuity loan isn’t the best option for many people because it can be expensive and reduce the amount of income payments you receive. If you’re considering using your annuity to get a loan, make sure you understand how it works so you can decide if it’s right for you.
Can you withdraw money from your annuity?
How does an annuity loan work?
There are two ways to use your annuity to get a loan:
Most insurers will let you leverage up to 50% of your annuity’s cash value for a loan. This means that if you’re going through a bank you can use up to 50% of the vested account balance in your contract as collateral. If you’re borrowing directly from the annuity, you can usually borrow up to 50% of your annuity’s vested account balance. [1]
However, every insurer is different, so make sure you understand your individual contract’s loan terms. For instance, many companies also limit the total amount you can borrow and the number of times you can borrow from your annuity.
When does it make sense to use an annuity as collateral for a loan?
Using an annuity as collateral can be unnecessarily risky. You should only borrow against your annuity if you need a loan and have no other options. Typically, this is the case when:
You need cash fast, if, for example, you have to pay unexpected medical bills or put a down payment on a real estate purchase.
It’s the only loan you’re eligible for due to poor credit history or any other reason.
If you determine that borrowing from your annuity is your best option, the type of annuity you have will impact the options for your loan.
Learn more about the different types of annuities
What type of annuities can you borrow from?
In general, it’s easier to use a non-qualified annuity to get a loan than it is to use a qualified annuity.
Can you take a loan from a qualified annuity?
If you have a qualified annuity, you may be able to use your contract to borrow money. However, because qualified annuities have more regulations and have to meet certain legal requirements, it may be harder to use your annuity for a loan.
Do annuities affect financial aid and other benefits?
Can you use a qualified annuity as collateral for a loan?
Due to IRS regulations, you can use a qualified annuity for a loan only if it’s housed in an employer-sponsored plan, such as 401(k), 403(a), 403(b), or a governmental plan. You can’t borrow money from an IRA or use it as collateral. [2]
What is the impact of interest rate changes on your annuity?
How to take a loan from a qualified annuity
If you’re considering taking a loan from your qualified annuity, reach out to the insurer who owns your annuity to determine if you’re eligible.
For most qualified annuities, loans can be taken without penalty if:
The money is paid back within five years.
The loan is $50,000 or 50% of your vested account balance cash value, whichever is less.
You use the money to pay for a down payment on your first home purchase.
Learn more about annuities vs. IRAs
Can you take a loan from a non-qualified annuity?
Most non-qualified annuities allow you to borrow money from them. Taking a new loan from your non-qualified annuity is relatively straightforward because the money is subject to less regulation.
How to take a loan from a non-qualified annuity
Taking out a loan from your non-qualified annuity is a simple process. You’ll reach out to the insurer providing your contract to verify that you’re eligible under the terms of your contract.
Make sure to understand the interest rate of repayment you’ll get, the maximum amount or percentage you can withdraw from your contract, and when your loan repayments will start.
Once you complete your application, you wait for approval, and sign your acceptance letter.
Your loan will then begin. With an annuity loan, it’s important that you honor the repayment terms, as the penalties can be costly.
Can you lose money in an annuity?
How to use a non-qualified annuity as collateral for a loan
Technically, you can use your non-qualified annuity as collateral for a loan. However, this should be a method of last resort as it’s a costly transaction.
If you do choose this route, the IRS considers the transaction a withdrawal, meaning you’ll pay taxes on the money you use as collateral, and if you’re under age 59 ½, you’ll pay a 10% penalty on those funds.
Are annuities a good investment?
What are the pros & cons of taking an annuity loan?
While an annuity loan may not be the best option for most people, it can be used as a helpful financial tool. Know the pros and cons of taking an annuity loan before you pursue that route.
Pros
You’ll avoid surrender charges. If you need money from your annuity, taking out a loan will help you avoid surrender charges. If your annuity allows you to take out a loan, you can do this without paying fees — as long as you pay the loan back. The alternative to taking out a loan would be to surrender part of your annuity, which will require you to pay surrender fees. Taking out a loan instead can save you from paying these fees.
You’ll avoid taxes and fees. If you cash out your annuity before age 59 ½, you’ll be taxed on the money and pay a 10% penalty. If you need the cash and can take a loan instead, you’ll defer paying taxes on your annuity and avoid the 10% penalty required by the IRS.
Cons
Risk paying withdrawal penalties. If you fail to repay your annuity loan, you’ll face expensive withdrawal fees and be subject to taxes on the money you took out. This can be a costly transaction.
Lost earning potential. Taking money out of your annuity means that the money in the annuity won’t grow as expected. Whether you have an aggressive variable annuity or a more conservative fixed annuity, you can still expect a degree of return. Taking out an annuity loan forfeits this expected growth.
Learn more about fixed vs. variable annuities
What happens if you default on an annuity loan?
One of the greatest risks with an annuity loan is defaulting on the loan — not paying the loan back on time. If this happens, you’ll pay heavy fees, and may even end up losing money on your annuity overall.
Should you use your annuity as collateral for a loan?
If you have any other option for securing a loan, you shouldn’t use your annuity as collateral due to missed opportunities for growth and potentially high fees, especially if you aren’t able to pay the loan back.
However, if you’re in a situation where you need to borrow from your annuity, having the option can be helpful. Make sure you understand the potential fees involved before using your annuity as leverage to secure a loan.
How does an annuity fit into your overall retirement plan?
