Annuitants who are in need of cash have a couple of annuity-based routes to get cash now:
- get a loan,
- withdraw funds from the annuity, or
- sell the annuity.
Can You Borrow Against/From Your Annuity?
Yes, you can borrow against your annuity. Most annuity providers will allow annuity holders to borrow up to 50% of the cash value of the annuity. Whether or not you are allowed more than loan against your annuity at a time depends on the insurance company that holds your annuity.
Can You Borrow From Your Annuity to Buy a House?
Yes, you may borrow from your annuity to buy a house. You will have to pay interest on the borrowed funds and you may have to pay administrative fees. Further, failing to repay the loan during the contracted loan term will result in tax liability.
What is an Annuity Loan?
An annuity loan is a type of loan in which an annuity holder borrows money against the value of their annuity contract. It can allow people to access funds without going through the process of cashing out their annuity, which may leave them exposed to taxes and penalties.
However, each annuity provider has different terms and conditions, so it’s important to research the available options.
When Can You Take Out an Annuity Loan?
With a deferred annuity, the annuity holder makes regular payments to their insurance company toward the purchase of the total annuity contract. Once that person reaches retirement age (currently 59 ½), the annuity will pay them a set amount of money each month.
However, before the individual reaches retirement age, they can borrow against the cash value of the annuity contract and the loan must be repaid with interest over a set amount of time (typically five years).
How to Apply for an Annuity Loan
- Find out if your annuity allows you to take a loan against it. What is the payback period? What is the interest rate? Can you afford this? Is this loan a good move to support financial goals?
- Review the loan application and details. Does the application as anything that is not clear to you? Do you have all of the required documents?
- Submit your application. Keep a copy for your records.
- Receive a response. Hopefully, your request is approved.
- Sign the approval letter/contract, as required.
If approved, the loan will be processed and the borrower/annuity holder will receive a lump sum of cash. Payments must then be made according to the schedule provided by the lender until the balance is paid off.
Annuity Loan Companies
- American General Life Insurance Company (AIG)
- Genworth Life and Annuity Insurance Company
- John Hancock
- Metropolitan Life Insurance Company (MetLife)
- New York Life Insurance Company
- Massachusetts Mutual Life Insurance Company (MassMutual)
- Pacific Life Insurance (& Annuity) Company
- Prudential Insurance Company of America
What Happens if You Default on Your Annuity Loan?
If you don’t pay back your annuity loan, the loan money that you received is reclassified as a “distribution.” Depending on your age, a distribution may expose you to a 10% early distribution fee and federal income tax liability. Additionally, your annuity’s earning potential will be reduced.
What are the Advantages of Borrowing Against an Annuity?
Advantages of borrowing against an annuity are avoiding surrender charges, taxes, and penalties.
Avoid Surrender Charges
When someone opens an annuity contract, they will pay a surrender charge if it is canceled within a set amount of time. These surrender charges will sometimes wipe out any gains the annuity holder has accrued through the contract. However, with an annuity loan, the borrower does not have to pay surrender charges.
Avoid Taxes and Early Distribution Penalties
An additional benefit is that the borrower can avoid taxes and early distribution penalties. For example, if an annuity holder sells their annuity before reaching age 59 1/2, they will be charged a 10% “early distribution” penalty on the amount withdrawn. Also, there will be tax implications for the annuity sale. An annuity loan can help avoid these charges.
What are the Drawbacks of Annuity Loans?
Drawbacks of annuity loans include the potential for an early withdrawal penalty and an annuity earning less than planned.
Incurring an Early Withdrawal Penalty
Although it seems that an annuity loan is a convenient way to get cash in hand, there are some drawbacks. For example, if the borrower doesn’t repay the loan in the specified time frame, it will be deemed a “distribution” and he/she will be subject to an early distribution penalty, which is usually 10%.
Lower Earning Potential
Borrowing money against an annuity removes money that is necessary drive the performance that you planned when investing in that annuity. This means that the annuity is unlikely to grow as expected and the annuitant may forego potential earnings.
Generally, annuity loans can only be provided by issuers. It’s theoretically possible to get an annuity loan with annuityfreedom.net but you must qualify and we would need more information to know if you qualify etc. So provide your contact info and let’s take a look. If you’re considering selling your annuity, please contact us for help by either completing our contact form or calling us.