Are you in need of a large lump sum amount for committing any kind of down payments? If so, the good news is that you can borrow from your annuity. However, you need to pay some borrowed fees, interest, and penalties.
So, if you possess an annuity and need cash, then there are two main ways to get that. You can either get a loan against your annuity or in the form of cash in your annuity. At the end of this article you will have a fare idea about the question Can I Borrow From My Annuity ?
Annuities are a unique kind of investment that has a combination of both investment funds and life insurance. They are generally a series of payments made at certain intervals. Depending on the type of annuities, the payment period can vary like weekly, monthly, yearly, etc.
The annuities are calculated with the aid of several mathematical functions called ‘annuity functions.’ Take some time to give this informative guide a read for clearing your doubt regarding ‘Can I borrow from my annuity?’
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Table of Contents
What Is An Annuity ?
As you have ended up here to know whether you can borrow money from an annuity, you may already know about annuities. Still, let us get to know the very basics of annuities first.
An annuity is an investment asset class that you need to get from an insurance company. You can invest in either lump sum form or as a series of installments. So, in this part, you can think of it as a mutual fund where you can do either lump sum or SIP investments.
Based on that, you will get periodic payments from annuities including a certain rate of interest. Frankly speaking, it’s a type of loan that you pay the insurance company and in return, they pay you the EMIs. One of the major reasons for you to consider annuity investments is that the payments are fixed and predictable, unlike the stock market.
The annuities are very expensive to issue and so companies cover that cost through penalties. There is also an option to add your beneficiaries so that they can also get the payments in case of your death. Depending on the annuity specifics, you can even withdraw payments earlier without penalties.
Let’s now see how to get money out of annuity without penalty!
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How to Get Money Out of Annuity Without Penalty | Can I Borrow From My Annuity ?
There are some ways through which you can withdraw annuities without penalty. Below are some of the highlights that you can do.
- Firstly, go through your annuity contract once more and check the clauses for surrender fees properly and carefully. Generally, as your annuities grow older, the surrender fees decrease. So, be patient and wait for the annuity to expire before withdrawing the money.
- Some annuity contracts are also available that allow owners to withdraw 10-15% of their investment yearly without any kinds of penalties. So, always check the clauses and go for those annuity contracts as per your convenience and requirements.
- The best age to withdraw your annuity is 59.5. If you are younger than this, a 10% penalty is charged on the taxable portion. This is charged extra than the regular tax.
- You can even buy a ‘no-surrender’ annuity which does not have any surrender fees. They can be advantageous to withdraw without penalties although these annuities have lower features and higher administrative fees.
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Can I Use My Annuity As Collateral for A Loan ?
To understand this, let me first talk about what collateral means. It’s a kind of asset that banks or loan providers can seize if you fail to pay off the loan in the long run. For instance, you can keep your house as loan collateral which implies that the lender can take over your house if you fail to pay the loan.
On the other hand, you can even keep your shareholdings as collateral to get your loan approved. It means that if you fail to repay the loan, the lender can sell your shares and get their desired amount. So, having collateral for a loan is a positive thing because that lets your loan get approved easily.
Coming to this context now, you can use your annuities as collateral for a loan but that majorly depends on the type of annuity you own. All types of annuities can’t be used as loan collateral.
The annuities can be classified based on various considerations like the amount of investment, the amount you wish to receive, or the period of that annuity.
Depending on the time you want to receive payments from the annuities, they can be majorly classified as immediate or deferred annuity plans. Both these types’ behaviors go by their names only. With the immediate annuity plans, you will start getting payments just after investments while the deferred ones will not start the payments instantly rather at a future date.
Depending on the type of receiving payments, annuities can also be subcategorized into variable and fixed plans. The variable annuity plans will provide you payments depending on your investment’s performance. On the other side, fixed ones offer you fixed payments at regular intervals. The former one is riskier than the latter, so go as per your risk appetite.
To use an annuity as loan collateral, you need to check whether it is a qualified annuity or a non-qualified one. The qualified ones are those that are purchased with pre-taxed money through retirement accounts or employer as a retirement plan. The income from these annuities is taxed after you retire or withdraw the money. They can’t be used as loan collateral but you can get an annuity loan through qualified annuities.
The annuities that can be used as loan collateral are the non-qualified ones that need to be purchased with the money that are already taxed earlier. Here, the income from annuities will not be taxed fully rather only the earnings or interest will be taxed.
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Annuity Loan Example :
If you are in urgent need of cash for any financial requirements, you can take a loan against your annuity based on the value of the contract. This will let the annuity holders receive funds without the need to cash out the annuity.
You as a borrower first need to send a request to the issuing authority of the annuity. If the insurance company approves the loan, then you will receive the lump sum amount. Generally, most companies allow 50% of the value to be taken as a loan. But, the terms and conditions can vary from one company to the other, so do proper research and review the contracts.
As an annuity loan example, let’s say that you have made an annuity investment of $10,000 at a 5% rate of interest with an insurance company ‘A.’ This will generate a regular yearly income of around $500. At a certain point in time, you are in urgent need of $6000 and you have only $1000 liquid cash.
In such a case, you can reach out to the company ‘A’ for getting an annuity loan. If they assure you that they provide a 50% loan on the annuity amount, then you can easily apply for a $5000 loan amount that was falling short.
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Final Words !
We hope that this guide has cleared the doubt in your mind regarding ‘Can I borrow from my annuity?’ We have tried our best to make you understand it by exploring different angles that you need to be aware of.