Can I Use My Annuity as Collateral for a Loan?

Annuities are good life investments. It gives financial security in your later years. But, paying an annuity requires commitment and financial planning. Unlike other investments, annuities don’t immediately vest. You will have to wait for the annuity contract date before you can enjoy its financial rewards. And sometimes this can take a long time. 

Are you experiencing financial challenges now? If you do, using your annuity as collateral for loans might have crossed your mind. So you ask, “can I use my annuity as collateral for a loan?” The answer to that question is a straightforward yes. However, there are crucial points you must know before proceeding with any decisions or  from actions.

In this article, you’ll learn more about the different types of annuities and how you can utilize them for your financial needs. This article will also give additional information about annuities and how it works.

Annuity as Collateral 

Yes, it is possible to use your annuity as collateral for third-party loans. This scenario happens when you have a non-qualified annuity. Companies that offer non-qualified annuity programs  often do not include a loan provision to the annuity contract. Meaning, you can’t directly borrow money against your annuity fund. Instead, you can use your annuity as collateral to apply for loans with banks or other financial institutions.

If you have a qualified annuity plan, you can borrow against your fund. Most qualified annuities have loan provisions. But, you have to speak with your insurance provider about this first. Otherwise, only non-qualified annuities can be used as collateral. However, before you apply, it’s best to contact the financial institution and ask if they accept annuities as collateral. If they accept, you can then apply for a loan.

However, here’s a fair warning. Even if you can use annuities as collateral, it will be burdensome in terms of taxation. The IRS will expect you to pay additional taxes. If you read further, we’ll discuss the tax effect of this in detail.

Loans Against the Annuity

Unlike a non-qualified annuity, you can have an annuity loan if you’re on a qualified annuity program. A qualified annuity is a retirement plan that complies with the Employee Retirement Income Security Act (ERISA). So you might ask, “can I buy a house with my annuity money?” 

Yes, you can!

With this type of annuity, you can get a loan against the annuity fund as long as it complies with the following requirements:

  • The proceeds are paid back within five years.
  • The loan is 50 percent of the vested balance or $50,000, whichever is lower.
  • The loan proceeds are used for a first-time home purchase.

Pros and Cons of Using Annuities for Loans

Now that you know that it’s possible to use an annuity to get loans, you should be aware of  some pros and cons about it. Annuities per se are not intended to be used for loans, and using them for such purposes may yield good benefits BUT may also come at a high cost.


  1. Annuities are both long-term investments and insurance products. With that, non-qualified annuities can be attractive loan collateral for banks. 
  2. In the case of qualified annuities, its loan provision enables you to borrow your investment temporarily. The bottom line is that annuities can give you more financing options aside from traditional ones.


  1. Not all banks or financial institutions accept annuities as collateral since it’s not a conventional or typical collateral unlike land, house, or vehicles.
  2. Taxes can be too costly on your part. The IRS will charge you taxes that could be avoided if you didn’t use the annuity as collateral.

Tax Effect from using Annuities as Collateral  

Assuming Carol, 40 years old, used her non-qualified annuity as collateral for a $50,000 loan. For tax purposes, the whole loan amount is also the taxable amount. So if Carol belongs to the 24 percent tax bracket, she’ll pay taxes of $12,000. But, since Carol is below 59 ½ years old, she will also pay a 10 percent penalty. That’s equal to $5,000.

Overall, the net proceeds of the loan is only $33,000 after deducting taxes of $12,000 and penalty of $5,000 to the loan amount of $50,000. In percentage form, the cost of financing is 34 percent. But we’re not yet done. Even if Carol received $33,000 only, she will still pay the creditor $50,000 plus interest.

Implications of Using Annuities as Collateral

An annuity used as collateral for loans has other implications that may be  disadvantageous to you. This section will discuss the implications of using qualified and non-qualified annuities in loans.

Implications in Qualified Annuities as Collateral

As discussed earlier, you can use the balance of your qualified annuity to get a loan from the insurance provider. However, you pay qualified annuities premiums with “pre-tax dollars” since this type of loan has tax preference. But upon annuitization, every payment will be counted as taxable income.

But since you’re obtaining a loan out of your annuity fund, the Internal Revenue Service (IRS) will tax you twice. The first taxable event will be when you take the loan, and the second one will be when you receive payments from the annuity fund. 

Illustration: John has a qualified annuity fund with a fund balance of $100,000. He intends to obtain a loan of $20,000 out of the annuity fund. What are the implications of this loan?

Implications: First, the IRS will consider the loan as a withdrawal, classify it as part of taxable income, and subject it to ordinary income tax rates. Of course, John will return the $20,000 to the fund. But, the $20,000 will be taxed again when he starts receiving annuity payouts. So, the IRS is gaining extra tax dollars from John.

Implications in Non-qualified Annuities as Collateral

Based on IRS regulations, using non-qualified annuities as collateral is considered a non-periodic distribution. It means that a withdrawal occurred before its destined date. If you use non-qualified annuities as loan collaterals, here are the significant implications:

  • The amount will be subjected to ordinary income tax rates.
  • The tax base will include accumulated gains.
  • A penalty tax of 10 percent will be charged if the annuity holder is below 59 1/2 years old.

What Are the Types of Annuities?

In the discussions above, you learned about qualified and non-qualified annuities. This classification refers to annuities as to compliance with ERISA. However, there are also other classifications of annuities, which will be discussed below. To make it easier for you, these types of annuities are grouped according to their nature.

  1. Annuity as to Interest Determination
  2. Annuity as to Payout Option
  3. Annuity as to Payment Period

Annuity as to Interest Determination

Annuities can be classified according to their interest rate. The kind of interest in the annuity also determines the level of risk associated with the annuity contract. So, annuities can be:

1. Fixed

A fixed annuity guarantees a steady stream of income for the annuity holder. This type of annuity has the least risk because interest rates remain fixed regardless of the market’s movement. Of all types of annuities, fixed annuities are the most straightforward because they do not rely on any portfolio or investment performance.

2. Variable

A variable annuity is the exact opposite of a fixed annuity. In terms of risk, this type of annuity is the riskiest since it is affected by the market’s movements. Moreover, variable annuities rely on the performance of portfolios or investments. However, if the market is looking up, variable annuities realize more gains than fixed annuities. But if the market goes down, variable annuities also suffer a loss.

3. Indexed

An indexed annuity is the best of both worlds. It has characteristics of both fixed and variable annuities. Being a mix of two, the overall risk associated with indexed annuities are somewhat in between. This type of annuity earns more income than a fixed annuity and carries less risk than variable annuities.

Annuity as to Payout Option

Annuities as to payout option refer to annuities’ classification based on when the annuity holder will receive payments. Below are the two payout options standard in annuity contracts:

1. Immediate Annuity

Also known as income annuity, this type of annuity pays the holder immediately after one year of purchasing it. Immediate annuities are for income purposes only. Insurance companies also call this “single-payment insurance annuities” or SPIA. In an SPIA contract, the annuity holder pays a lump-sum, upfront premium. In return, the insurance company will release a steady stream of income a year after on a monthly, quarterly, semiannually, or annual basis.

2. Deferred Annuity

Unlike an immediate annuity, a deferred annuity pays the holder at the annuity date (e.g., at retirement age, 70 years old, etc.). Deferred annuities have two phases: the accumulation phase and the payout phase. Annuity holders will pay annuity premiums during the accumulation phase. The premium payments will compound based on the interest rate (e.g., fixed, variable, indexed). At the payout phase, annuity holders will receive a certain amount until the end of the payment period.

Annuity as to Payment Period

In the previous section, you learned how annuities accumulate. Now, this section will talk about the payout phase of annuities. Once the annuity vests to you, the insurance provider will incrementally release a stream of income payments. The duration that the insurance provider is required to give income payments is called the payment period. Below are the types of annuities as to the payment period:

1. Lifetime Annuity

A lifetime annuity secures a steady stream of payments for the rest of your life. As long as you’re alive, the insurance provider will continue to pay you. Other lifetime annuities even extend to the beneficiaries (e.g., spouse, minor children, etc.). If a lifetime annuity extends to a beneficiary, it ceases when the beneficiary loses the qualification of being a beneficiary, i.e., death or reaching the age of majority.

2. Fixed-period Annuity

As the term suggests, the number of payment periods is fixed in the annuity contract. Fixed terms can be one to 30 years, depending on the insurance provider. A fixed-period annuity is an ideal source of cash flow during retirement since there’s a possibility that you may outlive the annuity. You can only use this as a supplement to your main retirement fund.

How Do Annuities Work?

Annuities can be complicated, especially how it’s being computed in finance. This section will try to discuss this concept in the simplest way possible. In general, you purchase annuities because you want to receive money in the future. But how do you accumulate that amount? You pay premiums.

Premiums are periodic payments you give to insurance providers. Just think of annuities and premiums as “paying it forward” or “pay now, enjoy later.” But, your premium won’t just sit idly with the insurance provider until you retire. Instead, insurance providers will invest your money in the market to generate profit. Since you’ll be needing the annuity in 20 or 30 years, your premiums will be temporarily used as capital for investments.

And if you reached your retirement age or the annuity date, the insurance company will start paying your annuity payouts. But where will they get the money for that? They’ll get it from the investment profits and recent premium payments of new annuity holders. And as the cycle continues, insurance companies can fund all retirement plans while receiving more premiums and generating investment profits.

Should You Use Annuities as Collateral?

If you want to save money, it’s best not to use annuities as collateral. Aside from being costly and disadvantageous like additional taxes and penalties, it can do more harm than good. As stated in the previous sections, annuities are intended to be investment devices. It’s best if they’re used that way.

There are other ways to obtain additional financing. Using annuities as collaterals is just not the most beneficial way. So before you make a decision, consider first the costs and compare them with the benefits.

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