The Truth About Annuity Financing
There are many quick-cash schemes out there, but an annuity loan isn’t one of them. This financing is legitimate, and you borrow money against your retirement funds. This can and cannot be a good idea; it depends on your personal circumstances, including your age. Learn the truth about annuity financing to better understand whether this type of loan would work for you.
What It Is
If you are an annuity policyholder, a loan against your contract provides a lump-sum of cash. Depending on the insurance company, you may be able to borrow half of your total contract. The money will be dispersed upon approval, and you will be required to pay it back via monthly payments. An interest rate will be attached to your loan, so in many respects, annuity financing works much like any other traditional funding source.
What It Isn’t
Unlike a traditional bank loan, taking out cash against your policy doesn’t have a lot of leeway. If you cannot make your monthly loan payment to the bank, you can call it and work something out. If you fail to make your monthly payment toward your annuity loan, what you borrowed will be reclassified as an early distribution of your retirement funds if you’re under the age of 59 1/2, and that means answering to the IRS.
Uncle Sam frowns upon taking out your retirement early, whether it is from your annuity or another account. In fact, to discourage people from doing this, the IRS will tax you on your early distribution and hit you up for a 10-percent penalty as well. This hurts, no matter how you slice it. So you must be able pay back your annuity financing without a hitch.
Some Additional Considerations
This being said, it’s wiser to borrow against your policy than to cash it out prematurely. Not only will the IRS take its slice of the pie if you surrender the contract for its accumulated cash, your insurance company will also assess a fee for early withdrawal. Not to mention that when borrowing against the retirement fund, you’re paying it back, and this means you will continue to build your portfolio prior to your golden years.
Cashing it out dissolves the fund completely, and leaves you with nothing once you’ve spend the money. Borrowing against it means you will still have a balance that is collecting interest and investment gains. If you can pay your annuity financing back quick enough, you will replace the balance plus gains and may never know you took it out once you retire.