Annuity Loans: Can You Borrow Against One?

You purchased an annuity to secure your financial future. But now an unexpected expense has surfaced—a medical bill, a home repair, a family emergency—and you need cash. Your annuity holds a substantial balance, and you are wondering: can you borrow against it?

The short answer is that some annuities allow loans, but most do not. And even when borrowing is an option, the mechanics, costs, and risks are very different from borrowing against a 401(k) or a life insurance policy. Making the wrong move could trigger taxes, penalties, and the potential collapse of your entire annuity contract.

Before you tap into your annuity, you need to understand exactly how annuity loans work, what they cost, and whether better alternatives exist. This guide gives you the complete picture so you can make a decision you will not regret.

Can You Actually Borrow Against an Annuity?

It depends entirely on the type of annuity you own and the terms of your specific contract.

Annuity loans are not universally available. Here is how the landscape breaks down:

Annuities That May Offer Loans

Deferred fixed annuities and deferred variable annuities issued by insurance companies sometimes include a loan provision in the contract. This is most common with older contracts and with annuities that were designed to compete with cash-value life insurance products.

Tax-sheltered annuities (403(b) annuities) used in employer-sponsored retirement plans often allow loans under the same rules that govern 403(b) plan loans. The loan limits and repayment rules mirror those of other employer-sponsored plans.

Annuities That Typically Do Not Offer Loans

Immediate annuities do not allow loans because your lump sum has already been converted into a stream of payments. There is no account balance to borrow against.

Most modern deferred annuities sold directly to consumers do not include loan provisions. Instead, they offer withdrawal features—free withdrawal amounts, typically 10% of the account value per year—as the primary way to access funds before annuitization.

Indexed annuities generally do not offer loan features. Access to funds is typically limited to the contract's free withdrawal provision or a full surrender.

How to Check Your Contract

Open your annuity contract and look for a section titled "Loans" or "Policy Loans." If the section exists, it will outline the borrowing limits, interest rate, and repayment terms. If there is no loan section, your annuity does not permit borrowing.

You can also call the insurance company's customer service line and ask directly. Have your contract number ready.

How Annuity Loans Work

If your annuity does allow loans, here is the typical process:

Step 1: Request the Loan

You contact your insurance company and request a loan against your annuity's cash value. Most companies require a written request or a form submission. Some allow online requests.

Step 2: Determine the Loan Amount

Insurance companies set a maximum loan amount, usually between 50% and 75% of the contract's surrender value. The surrender value is your account value minus any applicable surrender charges.

For example, if your annuity has a $200,000 account value and the surrender value after charges is $185,000, you could typically borrow between $92,500 and $138,750.

Step 3: Interest Accrues on the Loan

The insurance company charges interest on the outstanding loan balance. Rates typically range from 4% to 8%, fixed at the time of the loan. This interest accrues whether or not you make payments.

Here is the critical part: the portion of your annuity used as collateral for the loan may earn a reduced interest rate (or no interest at all) while the loan is outstanding. This creates a net cost of borrowing that is often higher than the stated loan interest rate.

For example, if your loan rate is 6% and the collateralized portion of your annuity drops from earning 4.5% to earning 2%, your effective borrowing cost is not 6%—it is closer to 8.5% when you account for the lost earnings.

Step 4: Repayment Is Flexible (But Dangerous)

Unlike a 401(k) loan, most annuity loans do not have a mandatory repayment schedule. You can repay whenever you choose—or not at all.

This flexibility is deceptive. If you do not repay the loan, interest continues to compound. Over time, the outstanding loan balance can grow to consume your entire annuity value. When the loan balance equals or exceeds the contract value, the annuity lapses—and that triggers serious tax consequences.

The Tax Trap: What Happens If You Do Not Repay

This is where annuity loans become genuinely dangerous.

If your annuity lapses due to an unpaid loan, the IRS treats the entire gain in the contract as ordinary income in the year of the lapse. You owe income tax on every dollar of growth above your original contributions.

On top of that, if you are under age 59½, you owe an additional 10% early withdrawal penalty on the taxable amount.

Here is a real-world example of how this unfolds:

• You contributed $100,000 to your annuity over the years (your cost basis)
• The annuity grew to $175,000
• You borrowed $80,000 and never repaid it
• After several years, the loan balance with accrued interest reaches $175,000
• The annuity lapses

Tax consequence: You owe ordinary income tax on $75,000 (the gain above your $100,000 basis). If you are in the 24% federal tax bracket, that is $18,000 in federal taxes. Add the 10% penalty if you are under 59½, and you owe an additional $7,500. Total tax hit: $25,500—on money you already spent years ago.

This scenario is not rare. It happens to annuity owners who borrow with the intention of repaying "eventually" but never do.

Alternatives to Annuity Loans

Before borrowing against your annuity, consider whether one of these alternatives is a better fit for your situation.

Free Withdrawals

Most deferred annuities allow you to withdraw up to 10% of your account value per year without surrender charges. If your cash need falls within this limit, a free withdrawal is simpler and more straightforward than a loan.

The downside: Withdrawals from annuities follow a last-in, first-out (LIFO) tax rule. Earnings come out first, meaning your withdrawal is fully taxable as ordinary income until you have withdrawn all the gains. The 10% early withdrawal penalty also applies if you are under 59½.

Partial Surrender

If you need more than the free withdrawal amount, you can take a partial surrender of your annuity. You will pay surrender charges on the amount that exceeds the free withdrawal threshold. Surrender charges vary by contract and typically decline over a period of 5 to 10 years.

When this makes sense: If your surrender charge period is nearly over, the charge may be minimal—say 1% or 2%—making a partial surrender cheaper than a loan with ongoing interest costs.

Home Equity Line of Credit (HELOC)

If you own a home with equity, a HELOC may offer a lower interest rate than an annuity loan, and the interest may be tax-deductible if you use the funds for home improvements. HELOC rates as of 2025 typically range from 7% to 9%, but unlike annuity loans, there is no risk of collapsing your retirement asset.

Personal Loan or 0% Balance Transfer

For smaller amounts, a personal loan or a 0% introductory APR credit card balance transfer may be cheaper and less risky than borrowing against your annuity. These options keep your retirement savings intact.

Life Insurance Policy Loan

If you own a cash-value life insurance policy (whole life or universal life), borrowing against it is typically more favorable than borrowing against an annuity. Life insurance loans generally carry lower interest rates, and the tax treatment is more favorable. Learn more about your life insurance options.

When Borrowing Against Your Annuity Makes Sense

Despite the risks, there are situations where an annuity loan is the right choice:

You have no other source of liquidity. If your annuity is the only asset you can access and you face a genuine emergency, a loan preserves the contract while giving you the cash you need—provided you have a realistic plan to repay.

You are close to age 59½. If you are just below the penalty threshold, a loan lets you access funds without triggering the 10% early withdrawal penalty. Once you reach 59½, you can repay the loan with a withdrawal if needed.

The loan amount is small relative to your contract value. Borrowing 10% or 15% of your annuity value poses far less lapse risk than borrowing 50% or more. A smaller loan is easier to repay and less likely to spiral out of control.

You have a concrete repayment plan. If you know exactly how and when you will repay—perhaps you are expecting a tax refund, a bonus, or the sale of another asset—the short-term cost of the loan may be acceptable.

When Borrowing Is a Bad Idea

You have no repayment plan. If you cannot articulate exactly how you will repay the loan, do not take it. The compounding interest will eventually consume your annuity.

You are still in the surrender charge period. If your annuity is still within its surrender charge period, a loan creates a double risk: you are locked into the contract while the loan balance grows against a potentially declining account value.

The loan amount is large relative to your contract value. Borrowing more than 50% of your annuity value dramatically increases the risk of a lapse and the resulting tax consequences.

You are using the loan for discretionary spending. An annuity loan should be reserved for genuine financial needs, not vacations, vehicles, or other non-essential purchases. The long-term cost to your retirement security is too high.

Understanding Your Annuity's Full Lifecycle

An annuity loan is just one piece of managing your annuity contract effectively. You should also understand what happens when your annuity matures and what your options are at that point—including rolling into a new annuity, taking a lump sum, or annuitizing.

If you own an annuity and are unsure whether borrowing is the right move, take the time to review your contract terms, calculate the true cost of borrowing, and compare it against every alternative available to you.

The Bottom Line

Annuity loans exist, but they are not as simple or as safe as they might seem. The lack of a mandatory repayment schedule can lull you into complacency, while compounding interest quietly erodes your retirement savings. The tax consequences of a lapse can be devastating.

Before you borrow against your annuity, exhaust every other option. Use free withdrawals if possible. Consider a HELOC or personal loan. Talk to a financial advisor who understands annuity contracts and can model the true cost of borrowing against your specific contract.

Your annuity was designed to be a long-term retirement tool. Treating it like a short-term lending source undermines its purpose and puts your financial future at risk. Make sure any decision to borrow is backed by clear math, a solid repayment plan, and a full understanding of what you stand to lose.