Knowing What Is an Annuity Loan

Getting confused of what annuities are? You may spend a great deal of time figuring out what annuities are by reading different articles. However, annuities explained by some articles can be very confusing. Annuities are not that difficult to understand though. Basically, an annuity is a contract between you and a life insurance company that promises you to have a guaranteed income for life by giving you payments over a long period of time until a fixed date or until the account holder dies. As you put in money to that insurance company, your investment is entitled to have interest. The interest you get from that investment is tax free and could accumulate substantially over time.

There are different types of annuities explained vividly by tax advisors these are: fixed annuity, variable annuity and equity indexed annuity. Each type of annuity has its advantages and disadvantages. Fixed annuity gives you fixed interest rates for your investments. Interest rates of fixed annuities are usually lower than that of the other types, however, it is the safest way to accumulate funds. Interest rates may fluctuate; it may not go up every time that is why if an investor is worried that the interest rates may go down any minute it is best that he will have a fixed annuity policy. Variable annuity on the other hand, as its name implies will have varied interest rates over time. This is the most risky type of annuity. Lastly, there is equity indexed annuity. This type of annuity also has fluctuating interest rates that are based on the stock market. However, insurance companies give the investor a lower limit in the interest rate. They assure investors that it will never fall beyond that boundary.

These annuities can be used as collateral for loans in times of financial difficulties. These loans are called an annuity loan. An annuity loan is usually offered by insurance companies themselves. Because cashing out before 59 ½ will entail the account holder to pay penalties, it is wiser to barrow loan against the annuity. However, an annuity loan should only be done if you really need money such as to pay for treatments essential to health and others.