What is an annuity loan?

An annuity loan is a situation in which an annuity holder will borrow money against the value of his/her 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.

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 does the loan process work?

Before the loan can be initiated, the borrower must submit a request to the insurance company that issued the annuity contract. If approved, the loan will be processed and the borrower/annuity holder will receive a lump sum loan and must make payments until the balance is paid off. Most annuity providers will allow annuity holders to borrow up to 50% of the cash value of the annuity. However, each annuity provider has different terms and conditions, so it’s important to research the available options.

What are the advantages?

One positive aspect of an annuity loan is that it allows the borrower to avoid paying “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.

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sells their annuity before reaching age 59 1/2, they will be charged a 10% “early distribution” penalty on the amount withdrawn.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/pitfalls?

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%. Also, borrowing money against the annuity will hurt the ability of the investments to grow over time and the borrower may be forgoing potential earnings.

Prudential Insurance Company of America

Metropolitan Life Insurance Company

New York Life Insurance Company

American General Life Insurance Company

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.