Annuity Loans, Advantages and Disadvantages. Do you have an annuity but really need money now. Fortunately, you can sell a portion or all of your annuity for a one-time lump sum payment. Many people sell their annuities each year and you can do that too. But before that you need to know everything about Annuity loans.
Annuity Loans, Advantages and Disadvantages
Let’s get into the details:
What is Annuity Loan ?
An Annuity Loan is a condition in which an Annuity holder borrows money against the value of his/her annuity contract. Annuity also means a regular payment of equal amounts over a period of time. It allows individuals to access their retirement funds without going through the problem of cashing out the annuity. An annuity loan provides several benefits to those with an annuity and has several distinctive features to consider.
Some main features of Annuity Loans are:-
- With interest being paid at the beginning, repayment of loan capital is weighted towards the end of the loan period.
- A fixed loan period.
- The interest is higher at the beginning of the loan repayment period.
With a delayed annuity or deferred annuity, the annuity holder makes regular payments to their insurance company towards the purchase of the total annuity contract. Before the individual reaches retirement age, he can borrow against the cash value of the annuity contract and the loan must be repaid with interest over a given time. However, once that person reaches retirement age, the annuity pays him a set amount of money every month.
How Annuity Loans Work ?
Every annuity provider is different with the terms and services that they offer. In majority cases, you can borrow as much as half of the cash value of the annuity with a loan. In order to access this type of loan, borrower needs to speak to the company that issued your annuity. It requires to fill out a loan request form and then the loan will be processed. As soon as you fill out a request form, you will receive the funds in a lump sum and then you can make recurrent payments to retire the balance.
Advantages of Annuity Loans
One of the basic advantages of taking out an Annuity loan is that you can avoid surrender charges. Once you open an annuity contract, if you cancel it out within a certain amount of time, you will have to pay surrender charges. Majority of the time, these charges will erase any gains that you have earned through the annuity contract. If you want access to the money, you can simply borrow it from the annuity without cashing it in and thus surrender charges can be avoided. Another benefit of annuity loan is that you can avoid paying taxes and early distribution tax penalties. If you cash out your annuity before you reach retirement age, you will have to pay the 10% early distribution penalty on the amount that you take out. Also, you will have to count the money as regular income and pay income taxes on it.
Disadvantages of Annuity Loan
You may be thinking that an Annuity loan is a convenient way to get cash in hand. But that’s not true it has some drawbacks too. If you do not pay back the loan in time, it will be considered as “distribution” and you will be subjected to an early distribution penalty. Usually distribution penalty is 10%. Another problem is that borrowing money against the annuity will hamper the ability of the investments to grow over time and you will possibly miss out an extra money that could have been earned.
Maybe annuity loans have risks and drawbacks but it’s advantages and benefits are more than that. So, if you want lump sum money in your hands now, then you should go for it.
ALSO CHECK:- Importance of Insurance