Retirement Planning

5 Questions to Ask When Considering Investing in an Annuity

The financial crisis of 2008 cast a long shadow and people engaged in retirement planning want to do all they can to protect themselves from the vagaries of the markets. It's no wonder, then, that certain types of annuities-which can guarantee retirees a dependable stream of income - are a product that people consider for their investment strategy. Yet despite some of their benefits, they are not for everyone. Here are some key questions to ask yourself when considering investing in an annuity?

What Kind of Annuity is Best for You?

Many people don't realize that there's an array of annuities available for retirement planning so it's essential to carefully assess your needs to know exactly what kind of annuity might be best for you. In general, there are two main categories of annuities: immediate and deferred.

Within each of these two main categories, however, are a plethora of unique types, each with their pros and cons and some may offer helpful features like enhanced death benefits and guaranteed income riders. Annuity contracts can differ greatly - speak to your insurance representative or financial advisor about which could be right for your particular needs.

When Do You Want A Retirement Income?

An immediate annuity requires a one-time, initial lump-sum payment and begins to pay you an income immediately. A deferred annuity, on the other hand, involves a waiting or accumulation period during which you do not receive an income in order to allow your capital to grow while deferring taxes. Because there are various categories (fixed, indexed and variable-which we will discuss below) a deferred annuity can be a more complex option but will typically allow for more purchase payments than an immediate annuity.

How Comfortable Are You With Risk?

If you're risk averse, immediate annuities can be a simple, straight-forward retirement income option attractive to those who aren't comfortable managing investments and who don't want to worry about the volatility of the stock markets.

Deferred annuities offer various options that let you determine how your money is invested depending on your tolerance for risk. If your primary concern is minimizing risk to your contract value during the accumulation phase, a fixed deferred annuity could give you set rates of interest throughout this phase.

If, however, you are not risk adverse and are willing to trade a fixed rate of growth for the potential of greater returns, you may want to consider an indexed or a variable annuity.

An indexed annuity earns interest based on how a stock market index (such as the S&P 500®) performs and may provide a minimum guaranteed rate of return. A variable annuity offers you a variety of investment options (similar to mutual funds).

These investment options, like mutual funds, are subject to market risk and can result in a loss of your principal.

How Liquid Are Your Other Investments?

When investing in an annuity it's vital to understand that, in general, your money will have limited liquidity for a set period of time. This is known as a surrender period. During this time (usually anywhere from 2 to 10 years, depending on your specific annuity and carrier) you will incur a surrender charge if you withdraw funds from the contract. These charges can be substantial in the early years of the surrender period. Some companies will waive the surrender charge in the case of medical emergencies or other events described in the contract.

For this reason, it may be a good idea to have other, more liquid investment vehicles (such as mutual funds) in your retirement portfolio that you can withdraw money from should you need more access to your money.

Who Are You Buying the Annuity From?

Deciding how to finance your retirement is one of the most important decisions you'll ever make and it's imperative you ensure you're buying an annuity from a reputable company. After all, you may be expecting to receive payout for 20 or 30 years or more, so you need to know the business you're dealing with is going to last long-term. Luckily there are several rating agencies (like Standard & Poor's and A.M. Best) that rate insurance companies and provide objective reviews of their financial standing. They each use different ranking systems but are an excellent way to know if you are trusting your retirement to a financially stable company.

Annuities 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 1⁄2, an additional 10% 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 tax situation.

Product guarantees are backed by the financial strength and claims-paying ability of the issuing company.

If you need more information about the different types of annuities or tips for retirement planning, visit the Protective Life Learning Center.

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.

Annuities 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% 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 tax situation.

Product guarantees are backed by the financial strength and claims-paying ability of the issuing company.

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.

An indexed annuity is not an investment in an index, is not a security or stock market investment and does not participate in any stock or equity investments.

Annuities are not a deposit, not insured by any federal government agency, carry no bank or credit union guarantee, are not FDIC/NCUA insured and may lose value.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC (“SPDJI”) Standard & Poor's®, S&P®, and S&P 500® are registered trademarks of Standard & Poor's Financial Services LLC (“S&P”).

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

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