The History of Annuities

There are very few financial instruments with as long and rich a history as annuities.  For as big a role they play in present day personal finance, it may surprise many that annuities trace their history as far back as the days before Christ when Roman culture and armies dominated the world. In fact, the word annuity stems from the Roman Latin root, “annuus”, for yearly or recurring annually, which was the frequency in which stipends were paid to Roman citizens and soldiers by the Emperor in return for their service or financial contributions made to the government.

» Get Top Annuity Quotes Now

The Basic Structure

The basic structure of the annuity caught on in later centuries when European governments needed to finance their expensive wars.   The British government, in order to finance its war with France, adapted a scheme that was named after a Neapolitan financier, named Lorenzo Tonti, who created a similar financing method in France in the mid 17th century.  Tontine arrangements were eventually outlawed because they encouraged the physical elimination of investors so that their proceeds would be redistributed among the remaining investors until only a few remained.

In spite of this corruption of the basic premise, the annuity lived on as a method of financing private and public enterprises.  They made their initial appearance in the American colonies as a means for religious groups to provide retirement benefits for ministers where a promise to pay a lifetime income was made in return for contributions made by the ministers.

Annuities in the U.S.

At the turn of the 20th century, annuities finally became available to the public as a private financial instrument when a Pennsylvania insurance company began to issue individual annuities.

Annuities as an investment vehicle began to slowly catch on, but it was the financial upheaval of the 1930’s that triggered a huge demand for annuities by individuals and families that faced an uncertain future.  It quickly became evident that life insurance companies offered more financial security and stability than the banking institutions especially where the promise of future income payments was concerned.

The U.S. government also caught on and was at the forefront of encouraging the public to become thrift conscious in their spending and savings habits. The New Deal mentality also spawned the creation of corporate sponsored retirement annuities, or pension plans that also energized the individual annuity industry.

This early generation of annuities was fairly straightforward in their structure and application.  There was an accumulation phase with a guarantee of principal and a fixed interest rate, and there was an income phase with an option to receive payments for a lifetime or for a specified period of time. That’s it.

When favorable tax status was given to qualified retirement plans, annuities were included due to the many characteristics they share.  Also, because they are issued by life insurance companies, they are considered insurance contracts which also enjoy tax advantages.  As a result, their popularity continued to grow as income tax rates rose through the 1970’s. 

Don't Just Shop, Implement a Solid Retirement Strategy

Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.

Speak with an advisor over the phone about annuities for FREE.
(limited time offer)

The Transformative Period

In the early 1950’s variable annuities were introduced which changed the basic foundation of annuity savings forever.  Instead of a fixed rate of return, variable annuity rates were derived from the returns on separate investment accounts which were selected by the annuity owner.  

During the early 1980’s when inflation, interest rates and tax rates were at their historical highs, annuities reached their popularity apex.  Fixed annuities interest rates spiked up into the mid-teens. With tax rates as high as 70%, money began to flow from taxable savings into annuities.

It was the bull market run of the 80’s that catapulted variable annuities into the limelight. The opportunity for higher returns coupled with the tax deferral on earnings proved to be an irresistible combination for savvy investors.  The number of variable annuity products exploded and annuity sales shot up into the stratosphere. 

As the markets grew more volatile in the 1990’s and 2000’s, variable annuities began to lose some of their luster. And as interest rates fell to historic lows, fixed annuities became less attractive. Equity index annuities were introduced as a way for investors to participate in some of the upside of the market while limiting their downside risk, and they have grown in popularity in the face of some of wild market swings that have recently occurred.

Annuities Today

The competition for annuity premiums spawned several product innovations to entice new investors.  Such features as check writing, bonus interest rates, principal guarantees, and long-term care benefits have been added that bolstered the annuity’s preeminence as a complete financial management tool.

Over the years, annuities have had their critics, those who point to the fees and sales charges associated with annuities.  The response by annuity manufacturers was to introduce low-load or no-load annuities and reduce or eliminate surrender charges. 

In the last decade, annuity sales have more than doubled from the $99 billion recorded in 1995.  The number annuity products has expanded well into the hundreds which creates a much greater selection, but it also has created a lot of confusion for consumers trying to find the right product for their needs. 

Annuity products, once the domain of life insurance agents, have also found their way into the banks, brokerage houses and onto the internet which has propelled annuity sales even further.  Because annuities have evolved into more complex products than their ancestors, and because the tax issues are important to understand, it is strongly recommended that you seek the guidance of a qualified financial professional who specializes in annuity products.  

To find the best annuity products request a free, comprehensive quote comparision. Secure your retirement today, Get Started Now.