What Are Annuity Loans?

Annuity loans are the loans that are provided on the basis of annuity. Annuity is basically an investment contract made for the purpose of getting a regular retirement income. Annuity contracts are generally made by different types of insurance companies and are of two types. First type of annuity is a single premium annuity in which a person is required to pay a single consolidated sum. If same person wishes to make more investment in annuity in future, he is required to buy another annuity contract. This type of annuity is generally called as fixed annuity. Other type of annuity is the flexible payment annuity.

As the name suggests too, a person can make on-going contributions at his wish. In the fixed annuity, the insurance company guarantees a certain amount for a fixed period of time. On the expiry of this period, the insurance company if free to provide sum at higher or lower rates as compared to original one. In case of variable annuities, the amount provided to a person may change over a period of time as per the fluctuations in the market conditions. There as also some equity indexed annuities. In these types of annuities, amount can be provided at an assured minimum rate and at variable rate.

So far the annuity loans are concerned, these are provided at accumulated earnings in the annuity contract as well as on the earnings that are dispersed. The reader should note here that a person can accumulate earnings in a special type of account called as tax deferred account and the gains are not taxed until they are not withdrawn from the account. Since withdrawal of funds from this type of account can increase the tax liabilities of a person, it is better that he takes a loan against this amount. When amount is borrowed in the form of annuity loan, it is basically a tax free loan. The amount that can be borrowed by a person on the basis of annuity differs from one company to another, but the maximum amount is generally fixed. For example, in United States, a person can take a maximum of $50000 under annuity loan. A person is allowed to take an annuity loan when the account balance reaches the amount of $2000. The amount provided under annuity loan can be used for meeting any type of financial requirements. If a person follows all the guidelines carefully, he can easily avoid the penalty tax and income tax.

Using annuity as a collateral for the loan

A person can use the non-qualified annuities for taking different types of loans. In fact, people have been using these annuities for securing loans taken by them. However, it is important that a person must contact his tax consultant before using any type of annuity as collateral for the loan. This is because there are certain legal bindings associated with such an act. For example, in United States, if a person uses any part of qualified annuity as collateral for the loan, the total value of the annuity is considered as distributed for the tax year, as per the IRS form 5329.