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An annuity is essentially a contract between you and an insurance company. You buy an annuity by giving an insurance company either a single lump sum or making payments over time. The insurance company then invests your money (called “premium” or “purchase payment”) in different ways depending on the type of annuity you select. You can buy an annuity that begins making payments back to you right away (an “immediate annuity”) or, if you prefer, annuities are available that delay making payments to you for an extended period – sometimes many years – while your investment in the annuity grows. These are called deferred annuities.
Regardless of the type of annuity you buy, the primary purpose is to create income for you, and there are different ways to do that. You can set up payments that last for your entire life, a specific period of time or a combination of both.
For example, you may choose to receive monthly payments for 20 years.
Alternatively, you may want payments for your entire life, with a guarantee that you will receive payments for a certain period of time, say 20 years.
If you buy a deferred annuity, you can take withdrawals from the contract, even before your income payments begin. Each annuity has its own rules about how much you can withdraw from the contract without incurring a penalty – called a “surrender charge.” You may also completely surrender a deferred annuity. That means you tell the insurance company to cancel your contract and pay you the surrender value – the value of your contract less any surrender charge the company imposes.
Annuities are ideal for retirement planning. They allow you to convert a lump sum of money into guaranteed income for the rest of your life, or to invest over time and later convert the annuity contract’s value into guaranteed income payments. And, any growth in your annuity value is generally not taxed until you take money out of the contract. This combination of tax deferral and the ability to establish guaranteed income make an annuity an effective tool for retirement planning and other long term goals.
As you determine what annuity might be right for you, remember they are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity’s remaining death benefit, contract value, cash surrender value and future earnings. Annuities also may be subject to income tax and, if taken prior to age 59 ½, an additional 10 percent IRS tax penalty may apply. Because Protective and its representatives do not offer legal or tax advice, it is important that you talk with your own legal and tax advisor about your specific situation.
Variable annuities issued by Protective Life Insurance Company (PLICO) in all states except New York and in New York by Protective Life & Annuity Insurance Company (PLAICO). Securities offered by Investment Distributors, Inc. (IDI). All companies located in Birmingham, AL. IDI is the principal underwriter for registered insurance products issued by PLICO and PLAICO, its affiliates.
Neither Protective Life or its representative offer legal or tax advice. Purchasers should consult their attorney or tax advisor regarding their individual situations. All guarantees are subject to the claims-paying ability of the issuing insurance company.
Investments in variable annuities by definition involve market risk and the possibility of losing principal. Investors should carefully consider the investment objectives, risks, charges and expenses of a variable annuity and the underlying investment options before investing. This and other information is contained in the prospectuses for a variable annuity and its underlying investment options. Investors should read the prospectuses carefully before investing in an annuity.