An annuity is a fixed or variable investment contract, issued by an insurance company, that provides income payments to an annuitant or beneficiary, beginning immediately upon issuance of the annuity (immediate annuity) or at a future date (deferred annuity).

The income can be paid until the death of the annuitant, for a specified number of years, or as a fixed amount until the funds are depleted.

There are generally two stages in the life of an annuity. The accumulation phase, during which contract values builds, and the payment phase, when the contract values are distributed.

As we live longer in retirement, the concern becomes ensuring a continued income for life. An annuity is the only product which has the ability to provide you with a lifetime income guarantee. However, lifetime income is assured only if the insurance company backing your payment plan is sound, so choose your insurance company wisely.

Because of this unique lifetime feature, an annuity can be a valuable addition to your retirement portfolio. More people are turning to personal annuities for help in building a bigger nest egg for retirement because of the limitations imposed on IRAs and other popular long-term savings alternatives.

In addition, although tax reform (TRA '86) eliminated most tax shelters, personal annuities remain one of the few tax-deferred funding vehicles to accumulate savings for retirement. Another advantage of a personal annuity is that, unlike an IRA, there are no contribution limits or minimum distribution requirements at age 70½.* And, while contributions to personal annuities are not tax deductible, all earnings accrue tax deferred** until withdrawn, giving an annuity good growth potential.

*Applies to the annuity itself and not the qualified plan

**The tax features of an annuity are based on current tax law.

Annuities are uniquely suited for saving for retirement and providing a lifetime income in retirement. Because there is a 10% IRS penalty imposed on taxable distributions from an annuity prior to attaining age 59 1/2, generally, a deferred annuity should never be purchased except for the long-term.

Each year as you do your taxes you are probably reminded that contributions to an IRA may be deducted from current taxable income if you meet certain eligibility requirements.

A personal annuity, on the other hand, is one that an individual purchases with after-tax dollars.*

*An annuity which is not used to fund a qualified plan.

There are about 1,800 life insurance companies in the United States that sell annuities. While some consumers prefer to buy annuities directly from a company, most people buy them through insurance agents, financial representatives or brokers. Much of the information provided here will be helpful whichever way you decide to buy an annuity.

Before purchasing an annuity, check the company's financial condition. You can do this by asking the financial representative or requesting information from your state's insurance department. A number of insurance rating services rate the financial strength of companies. These ratings can be found in large public or business libraries, or can be obtained directly from the rating service. There may be a fee for the information.

You can access Northwestern Mutual's ratings from Standard & Poor's, Moody's, A.M. Best, and Fitch (formerly Duff & Phelps)—four of the largest rating services. Third party ratings are a measure of the company's relative financial strength and security, but are not a reflection of the performance or stability of funds invested in the company's variable (non-fixed) funds.

You should also check with the state insurance department to ensure the company is licensed in your state.

Collect the names of several Financial Representatives through recommendations from friends, family and other sources. The following are some questions you might want to ask a potential representative:

 Are they licensed in your state? All states require that representatives be licensed to sell life insurance. In addition, representatives who sell variable policies must be registered with the National Association of Securities Dealers and some states also require additional licenses.

 Does the representative have any professional designations? Professional designations include Chartered Life Underwriter (CLU) and Life Underwriter Training Council Fellow (LUTCF). Representatives may have also qualified to have the designation Chartered Financial Consultant (ChFC) or Certified Financial Planner (CFP®).

 Are they a member of a professional association? The major association for Financial Representatives is the National Association of Insurance and Financial advisors (NAIFA). Through NAIFA's local associations, Financial Representatives can attend educational seminars and can stay on top of trends in the business. Similar training and services are provided through the Society of Financial Service Professionals (formerly the American Society of CLU & ChFC).

A Financial Representative should be willing and able to explain various types of annuity features and benefits to you. Let your Financial Representative know what you expect from them. You should feel satisfied that the Financial Representative is listening to you and is recommending the appropriate solution for your needs. If you are not comfortable with the Financial Representative, or you are not convinced they are providing the service you want, find another Financial Representative.

As always, our Northwestern Mutual Financial Network Representatives can help with the Personal Planning Analysis—our free, no-obligation service which combines the best in technology with the expertise of our professional field force.