Retirement Planning

Understanding Annuities

If you're planning for retirement, you've likely heard the term 'annuity.' This article helps you understand the basics and what role annuities can play in retirement planning.

What is an Annuity?

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. This is called a deferred annuity.

How Does an Annuity Work?

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.

In this scenario, the company will calculate the payment amount based on your premium or the current value of your annuity contract, and begin making payments. Under this plan, you would be guaranteed to receive 240 monthly payments. If you were to die before all the payments were made, your beneficiary would receive the remainder, until all 240 payments were made.

Alternatively, you may want payments for your entire life, with a guarantee that payments will be received for a certain period of time, say 20 years.

In this example, if you were to die before the company made 240 monthly payments (20 years), your beneficiary would get the remaining payments, just like in the situation above. If you lived past the end of the 20-year guaranteed period, however, the insurance company would continue to make payments as long as you lived but your beneficiary would not be entitled to any payments after your death.

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.

Retirement Annuity

Annuities are commonly used 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 can 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 59½, an additional 10 percent IRS tax penalty may apply. Because Protective Life 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.

To learn more about available annuity options, call 1-844-733-5433.

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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.

What is a retirement annuity?

An annuity is a type of investment contract between you and a life insurance company. Designed for retirement planning, an annuity is one of the few investments that can provide a stream of payments for life.

Annuity contracts are funded with either a one-time purchase payment or a series of purchase payments, and there are many different types of annuities. Some begin annuity income payments immediately after purchase, while others first allow for asset growth over a period of time to help your retirement savings grow. Some either offer a fixed rate of return, a variable rate of return based on market performance or a combination of both.

Can I access my money?

A primary benefit of using an annuity as part of your retirement planning strategy is the creation of a stream of guaranteed payments when contract value is exchanged for them. Options are generally available when structuring your annuity income payments, including when you would like them to start and for how long. Be sure to consult your financial or tax advisors when you're looking at purchasing annuities to ensure you find the right solution for your retirement needs.

Annuities and your retirement.

When planning for your retirement, you'll find there are a variety of products, investments and strategies that can be used and combined to create a unique strategy to meet your personal retirement saving and income needs. A retirement annuity is one such product. Protective Life recommends you seek the advice of a qualified financial advisor who can help you better understand the available options and which is best for you. For more information, visit the Protective Life Learning Center.