Yes, you can borrow against some annuities, but the mechanics and costs depend on the annuity type and your contract terms
Not all annuities allow borrowing. Fixed annuities rarely offer loan features. Variable annuities sometimes do, usually through a rider you add when you buy the contract or later. when ready annuities and deferred income annuities typically do not allow loans at all. The first step is reading your annuity contract or calling your insurance company to ask whether your specific product permits borrowing.
If your annuity does allow loans, you are borrowing against the contract's cash value — the amount you could withdraw if you surrendered the annuity today. The insurance company lends you a portion of that value, usually 50 to 90 percent depending on the contract. You pay interest on the loan, and the borrowed amount is deducted from your annuity's death benefit and future payments.
Borrowing against an annuity is not the same as withdrawing money. A loan keeps the annuity contract active and lets the remaining balance continue to grow tax-deferred. A withdrawal, by contrast, ends part or all of the contract and may trigger income taxes and surrender charges.
Key Takeaways
- Variable annuities are the most common annuity type that permits loans, but only if your contract includes a loan rider.
- You borrow against the cash value of your annuity, and the insurance company charges interest on the loan amount.
- Borrowed money reduces your annuity's death benefit and any future income payments you would receive.
- Loans do not trigger the income tax and surrender charges that withdrawals do, but you still owe interest and repayment.
- Your annuity contract sets the maximum loan amount, interest rate, and repayment terms — these vary widely between products.
How annuity loans work: the mechanics
When you take a loan against your annuity, the insurance company advances you cash based on your contract's current value. You sign a promissory note agreeing to repay the loan with interest over a set period. The interest rate is typically fixed and stated in your contract — common rates range from 4 to 8 percent, but this varies by insurer and product.
The loan amount is secured by your annuity itself. This means the insurance company can recover the loan by reducing your future annuity payments or your death benefit. If you die before repaying the loan, the outstanding balance is subtracted from what your beneficiaries receive. If your annuity is paying you income now, the insurance company may deduct loan payments directly from those payments rather than requiring you to pay separately.
Some annuity contracts allow you to repay the loan on a schedule you choose, while others require repayment by a specific date or in full when the annuity matures. Read your contract to understand the repayment terms before you borrow. The repayment period can range from a few years to the life of the contract, depending on what your insurer permits.
Tax treatment: why loans differ from withdrawals
A loan against your annuity is not a taxable event. You do not owe income tax on the borrowed amount in the year you take the loan. This is the main advantage over withdrawals, which are taxable as ordinary income to the extent they come from gains in your annuity.
However, the interest you pay on the annuity loan is not tax-deductible. You pay it with after-tax dollars. When you repay the loan, the principal goes back into your annuity's cash value, and the interest is straightforward gone.
If you are under age 59½ and take a withdrawal instead of a loan, you may also face a 10 percent early withdrawal penalty on the taxable portion. Loans do not carry this penalty, which is another reason some people prefer borrowing to withdrawing.
Surrender charges and how loans interact with them
Many annuities impose a surrender charge if you withdraw money during the first several years of ownership — typically years 5 through 10, depending on the contract. Surrender charges are a percentage of the amount withdrawn and can be steep, sometimes 5 to 10 percent or more.
A loan does not trigger a surrender charge because you are not withdrawing money — you are borrowing it. This makes loans attractive to people who need cash but want to avoid surrender charges. However, the loan still reduces your annuity's value, so you lose the growth potential on the borrowed amount.
If you later withdraw money from your annuity while a loan is outstanding, the withdrawal may still be subject to surrender charges. The loan and the withdrawal are separate transactions. Some contracts allow you to withdraw a small amount each year without triggering a surrender charge, but a loan does not count toward that allowance.
When annuity loans make sense and when they do not
Borrowing against an annuity can make sense if you need cash in the short term and your annuity is in a surrender charge period. The loan avoids the surrender charge penalty that a withdrawal would trigger. It also avoids when ready income taxes on the borrowed amount.
Borrowing is less attractive if you are already receiving income payments from your annuity. The loan reduces those payments or requires separate repayment, which cuts into your cash flow. It also reduces the amount your beneficiaries will receive and the income you will have later in retirement.
If you need cash and your annuity is past the surrender charge period, a withdrawal is often simpler than a loan. You get the money outright, owe taxes on the gains only, and do not have to repay anything. A loan requires ongoing repayment and interest costs.
If your annuity does not offer a loan feature, your only options are to withdraw money (and pay taxes and possibly surrender charges) or to leave the annuity alone and find cash elsewhere.
Comparing annuity loans to other borrowing options
| Borrowing Option | Interest Rate | Tax Treatment | Repayment Required | Impact on Annuity |
|---|---|---|---|---|
| Annuity loan | 4–8% (varies by contract) | Loan is not taxable; interest is not deductible | Yes, per contract terms | Reduces cash value and future payments |
| Personal loan | 6–36% (varies by credit) | Not taxable; interest not deductible | Yes, per loan agreement | No impact on annuity |
| Home equity loan | 5–12% (varies by market) | Not taxable; interest may be deductible | Yes, per loan agreement | No impact on annuity |
| Annuity withdrawal | N/A | Taxable as ordinary income on gains | No repayment | Reduces contract value; may trigger surrender charges |
An annuity loan typically carries a lower interest rate than a personal loan, especially if your credit is not strong. However, a personal loan or home equity loan does not reduce your annuity's value or future payments. If you have access to either of those options at a reasonable rate, they may be worth comparing to an annuity loan.
The choice between an annuity loan and other borrowing depends on your interest rate, how much you need to borrow, and whether you can afford the repayment schedule. An annuity loan preserves your annuity contract but costs you in reduced future income. A personal loan leaves your annuity untouched but may carry a higher rate.
What to check in your annuity contract before borrowing
Your annuity contract is the governing document. It specifies whether loans are allowed, what the maximum loan amount is, what interest rate applies, and what the repayment terms are. Before you borrow, locate your contract and look for sections titled "Loan Provisions," "Policy Loans," or "Borrowing Options."
Key details to find: the maximum loan amount as a percentage of cash value, the interest rate (fixed or variable), the repayment period, whether you can extend the repayment period, what happens if you do not repay on time, and whether the loan can be deducted from your death benefit or your income payments.
If you cannot find your contract or do not understand it, call your insurance company's customer service line. They can tell you whether your specific annuity allows loans and what the terms are. Have your policy number ready.
Frequently Asked Questions
Can I borrow against an annuity I bought more than 10 years ago?
Yes, if your contract permits loans. The age of the annuity does not matter. However, if you are past the surrender charge period, a withdrawal may be simpler than a loan because you will not owe surrender charges and you do not have to repay anything.
What happens to my annuity loan if I die before I repay it?
The outstanding loan balance is subtracted from your death benefit. Your beneficiaries receive the remaining amount. If the loan balance exceeds the annuity's value, your beneficiaries receive nothing from that annuity.
Can I borrow against an when ready annuity?
when ready annuities typically do not allow loans because they are designed to convert a lump sum into income payments right away. Once you start receiving payments, there is no cash value to borrow against. If you need cash, you would have to stop the annuity and withdraw the remaining balance, which may not be possible depending on your contract.
Will borrowing against my annuity affect my Social Security or Medicare?
An annuity loan itself is not income, so it should not affect your Social Security benefits. However, if you are receiving annuity income payments and the loan reduces those payments, that reduction could affect your Medicare premiums if your income falls below certain thresholds. Consult a tax professional about your specific situation.
What if I cannot repay my annuity loan on time?
Your contract specifies what happens if you miss a payment or fail to repay by the due date. Some contracts allow you to extend the repayment period or convert the loan to a reduced income payment. Others may charge penalties or allow the insurance company to deduct the loan from your death benefit. Review your contract or ask your insurance company what options you have.