Most material things in this world--- clothes, electronics, new fads, and even money--- easily fit the phrase “Easy come, easy go.” They are everything but permanent, and there is no certainty when it comes to acquiring them, especially money. One day you are unbelievably rich, and then the next day, you are begging for food.
This is why many people are considering investments and other financial products and services to secure their assets and monetary valuables. One of the most recommended financial aids is annuity and its annuity loan.
So, what exactly is annuity and how does an annuity loan work? Read on and learn more about annuity loans--- you might consider it for your future.
Before jumping to annuity loans, you must first understand what annuity is.
To put things in the simplest way possible, an annuity is a long-term contractual financial investment acquired by people who want to secure their finances, putting their fear of outliving their income or assets to rest.
Through annuity, what you contribute (also called purchase payments) can turn into periodic payments that can benefit you in your later years, making it great for people who wish to still have money even after retirement.
Annuity can also be helpful for people who have won the lottery or gotten large cash settlements from lawsuits. These substantial lump sums can be converted into a steady and secure cash flow in the long run.
Now that you know what an annuity is, let us dig deeper and fully understand what an annuity loan is and how it works.
If you are an annuity owner and temporarily in need of cash, you can get an annuity loan.
Annuity loans are, basically, tax-free and only temporary, but are generally helpful in time of great need. It allows access to your retirement fund without really cashing it all out. Annuity loans can be paid back in periodic payments, which already include the installment and interest.
Also, when you choose to loan from your annuity fund, you have up to five years to repay it, although it can be stretched out to no more than 20 years (depending on the insurance provider).
So you have decided to get an annuity loan… but do you know how much you can borrow from your insurance provider?
Actually, it varies, depending on the terms and conditions of your annuity/insurance provider. But in most cases, the amount of your annuity loan can equate to as much as half of your whole annuity value. Now, that is a lot (if your contributions are also huge)!
Fortunately, there are basic annuity loan formulas that you can do on your own. However, these formulas only apply to loans with one payment and one addition of interest per term.
To calculate the loan, you must first determine the following:
To calculate the payment (P):
P = PV x r / 1 - (1 + r) -n
To calculate the present value (PV):
PV = P x (1 - (1 + r) -n) / r
To calculate the number of terms/payments (n):
n = - log (1 - PV x r/P) / log (1 + r)
Just like other products and services, there are also advantages AND disadvantages when it comes to getting an annuity loan. Sure, most of the time it is tax-free, but what happens when you are not able to pay it back on time?
Here are some important things to consider:
One of the visible advantages of getting an annuity loan instead of cashing it all out is that you do not have to endure heavy taxes with it. Yes, you can completely avoid shouldering taxes, as well as early distribution tax penalties.
The other advantage of acquiring an annuity loan is that you do not have to pay surrender charges anymore. These charges occur when you open an annuity contract, and then cancel before the right time. With an annuity loan, you can simply borrow some money from the annuity contract without having to pay any painful surrender charges.
Annuity loans sound good to the ears of those who need the money right away, but there are also some things that you need to consider before getting a loan.
For instance, if you are not able to pay back what you loaned within the allotted time, it will be considered as a distribution--- which means paying a 10% early distribution penalty. Not so good now, huh?
Another disadvantage of loaning against your annuity is this: the money that you could be continually earning because of investments can be hindered by the loan. As a result, you could miss out on acquiring extra money from the annuity.