Using Annuity Loans to Access Investment Capital
Good investors are always on the lookout for opportunities in the market. Whether it is the Dow facing a 10% correction or more, or a real estate market that is ripe for picking up investment properties, the opportunities don’t do us any good when our money is tied up in other investments.
One type of investment many people have put a large chunk of their savings into is annuities. An annuity is a type of insurance policy where you commit a dollar amount, usually substantial, to the insurance company for X number of years. In return, they send you a monthly or quarterly check. In essence, they are renting your money. At the end of the term, they give you the entire sum back, minus any taxes or penalties you may incur.
One way to access some investment capital if you have already committed your money to an annuity policy is to borrow against it. This is done by means of annuity loans taken out with your policy acting as collateral. If the loan is not paid, then the money gets charged as a “distribution” which can incur taxes and penalties. However, if you pay your loan according to the specified terms, an annuity loan is a cheap source of cash, because you are essentially borrowing from yourself. Interest rates are low and risks are fairly low.
The key, of course, is to make sure you have sufficient capital and a good enough investment vehicle with the loan proceeds to offset the interest rate you’ll be paying. In general, it is not wise to take out a loan to invest. However, there may be exceptions to that rule if you have a particularly attractive investment opportunity and your money is already tied up in an annuity. Of course, it is may be wise to check with your financial and tax advisors for more help making that decision.
