Annuities are contracts issued by insurance companies that enable the individual to purchase the right to have their money paid back in the future, plus interest. Moreover, individuals can designate their earnings from their annuity into a tax-deferred account so that the funds can grow tax-free to a higher amount than they would if they had been taxed first.
This deferred capital therefore becomes an asset to the individual that can be borrowed against, if necessary, thus creating an annuity loan. Every insurer's restrictions on borrowing against an annuity differs, but there is usually a maximum borrowing limit of around $50,000 regardless of the actual value of the account.
These annuity loans can also avoid income taxation as well as any early withdrawal penalties if the individual is at least 59 1/2 years old, they die or become severely disabled, or they experience significant financial hardship that makes withdrawing from what is essentially their retirement fund become a necessity.
Because most people who need annuity loans are in severe financial difficulties, their specific annuity provisions will list the requirements and the restrictions on withdrawing money early, and some plans will essentially not allow a "loan" at all, and only allow individuals to remove funds up to the amount of the contributions they have made.
Annuity loans should always be viewed as a last resort financial option for making payments that are vital to continued health and a basic lifestyle. Drawing on retirement funds is a risky move that should be done reluctantly and with the full intention of paying all borrowed funds back into the account.