How to Borrow From Annuities
Annuities are an investment product sold through the insurance industry, and are unlike most other investments in some crucial ways. Many financial advisers treat annuities as an unwanted stepchild, pointing to their limitations and often-high costs as reasons to avoid them. However, well-chosen annuities can play a valuable role as an avenue for tax-sheltered growth that isn't restricted by contribution limits. They also offer the option of borrowing from your balance when the need arises.
Basically, an annuity is simply a life insurance policy that's been turned on its head. Instead of paying a lump sum on your death, its primary purpose is to provide an income during your life. Fixed annuities are invested conservatively by the issuing insurance company, and provide a guaranteed return. Variable and indexed annuities invest in mutual funds or a major index, and take on some investment risk in exchange for the potential of greater gains. You can invest in either type through regular payments, or with a single lump sum.
Once your annuity is set up, it will continue to grow for years or decades until you convert it to a retirement income. During that time, you can request a loan from your annuity's accumulated cash value. The money is yours, so the process is simple. Decide how much you need to borrow from the annuity, and request loan forms from the insurance company that issued the contract. Fill them out, sign them and return them to the company. You'll usually receive your check within two weeks.
Although these loans are available at your discretion, don't use them thoughtlessly. As long as the funds are out of your annuity account, they're not providing you with any growth. If you take longer than expected to pay the money back, your long-term yields will suffer. Your insurer will also charge interest, as with any other loan. That said, borrowing from your annuity can be a relatively painless way to meet a transient financial need. It's also a potential source of funds for short-term investments, if the gain outweighs the interest penalty and loss of growth within the annuity.
If you have access to third-party credit on especially advantageous terms, you might opt to borrow against your annuity instead. The annuity has a cash surrender value, and can be used as collateral for that amount. You can also choose to surrender your annuity by cancelling the contract and withdrawing the accumulated funds. This can be costly, so consider your needs carefully before surrendering. During the early years of your annuity you'll pay stiff surrender fees to the insurer. All of the gains in your annuity become taxable as regular income during the current year, and the Internal Revenue Service will levy an additional 10 percent penalty on the taxable portion if you're under the age of 59 1/2.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.