Annuity Loans: How They Work and What You Need to Know

Shawn Plummer

CEO, The Annuity Expert

Annuity loans are a type of loan that is repaid in monthly installments over many years. An annuity can be used to borrow money for various reasons, but it usually has something to do with retirement. This guide will discuss how annuities work and what you need to know about them before getting one!

Annuity Loan Provisions

Deferred annuity contracts may allow borrowing from the contract during the accumulation period.

Loans taken from annuity contracts are deemed distributions and considered a taxable event to the extent of any gain under the contract. The lesser amount borrowed or the contract gain must be recognized as income.

Additionally, a loan taken by a contract owner under 59 1/2 will result in immediate early withdrawal penalties of 10% of the recognized gain.

Annuity Loan Provisions

Borrowing from a deferred annuity contract before the annuity start date (annuitization) is possible.

The Loan Account

When loan provisions are included in a deferred annuity contract, the loan amount is transferred to the loan account. Until the loan is paid off, the funds transferred to the loan account do not accrue interest from index crediting (index annuities) or investments in a separate account (variable annuities). Instead, they are credited with interest at the fixed account’s guaranteed interest rate, and the owner is billed regularly for loan interest. When the loan is repaid, the funds are transferred back to the annuity’s account.

Loans Are Considered Taxable Distributions

Loans from annuity contracts are considered distributions, and any loan taken is taxable to the extent of any gain under the contract. Therefore, the income is the lesser of the amount borrowed or the contract gain.

Furthermore, if the contract owner is under 59 1/2, the borrower will be penalized 10% of the recognized gain with early distribution penalties.

Can I Use An Annuity As Collateral On A Loan?

Yes, an annuity can be used as collateral for a loan. This means the lender can take possession of the annuity if the borrower defaults on the loan. However, the lender will typically only accept an annuity as collateral if it is a high-value annuity with a stable payout. The lender will also typically require the borrower to assign the annuity to the lender as collateral, which means that the borrower will no longer receive payments from the annuity until the loan is repaid.

Frequently Asked Questions

Can you borrow from an annuity?

Yes, it is possible to borrow from an annuity, although this option may not be available for all types of annuities and may come with certain conditions and limitations. Some annuities allow for loans against the account value, but taking a loan from an annuity can impact the growth of the investment and the future income it provides.

What is annuity loan?

An annuity loan is a type of loan taken against the value of an annuity contract. This option may be available for some types of annuities, but taking a loan from an annuity can impact the growth of the investment and the future income it provides.

Can i use my annuity to buy a house?

Yes, it is possible to use an annuity to buy a house, but it is not the most common use for an annuity. Some annuities allow for loans against the account value, which can then be used for a variety of purposes, including buying a house. However, taking a loan from an annuity can impact the growth of the investment and the future income it provides, so it is important to thoroughly understand the terms and conditions of the contract, as well as the potential impact on the investment and future income.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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