"The Value of Annuities Is Nothing New"

By: Robert Thomson

Annuities are a type of insurance for retirees or those planning retirement to place their funds with peace of mind that their financial needs will be met for years to come. While many think they're a "new" idea, they have actually been around for quite some time, much longer than most would consider.

By some historical accounts, it is said that annuities or "annua" date back as far as the Roman Empire, where citizens would give the Roman government a sum of money in return for a long-term yearly return on their initial purchase. These ancient annuities were great ways for the Roman Empire to raise funds for wars and public works projects. Although much more complex annuities exist today, many of the modern types work in a similar fashion as the Roman's.

Through the Middle Ages, annuities were sold at a single premium primarily to fund the constant warfare that was typical of that time period. A popular form of annuity during this time period was the tontine. A tontine served as part annuity and part lottery system. The people who bought shares in a particular tontine would have lifetime benefits. These lifetime benefits were placed in a pool and as each person died off, the remaining individuals who participated in a tontine would get more money. The last person left alive would get the entire remaining pool, making them lucky to be alive, in more ways than one.

In the 18th century, annuities were popular in Europe amongst upper class segments of society. In England, the state guaranteed a lifetime return on a lump sum purchase of annuities, which comforted people who were fearful of untimely financial ruin from the more risky and unstable investments that existed at the time. Parliament enabled citizens of England to be more confident in their annuity purchases by creating laws liberalizing the rules of who could buy. With the initial funds used to purchase annuity plans, the English government was able to add financial support to wars and the Royal Family's stipend.

The early stages of annuities in the United States were a slow but progressive incline. In the early days, they were mainly used by lawyers and estate planners who needed to set up some sort of long term payout for a deceased person's will in testament. Many Americans simply didn't see the point of paying out a large amount of money in exchange for a long-term payout when they could simply rely on the support of extended family members.

The period annuities began to really start catching on as a popular financial tool was in the early 20th century. Multi-generational families were becoming less and less common as a source of security. Also, the Great Depression was causing people to seek out larger and more stable places to place their money and to avoid financial ruin in the stock market. Insurance companies seemed to be a great safeguard for funds amidst the worst financial meltdown the United States has ever seen.

The American shift in financial culture also helped the growth of annuity markets. The "saving for a rainy day" mentality that was associated with the "New Deal" helped people figure out new and creative ways to plan for their financial futures. Despite a healthy retirement benefit being offered to Americans in Social Security, Franklin Delano Roosevelt encouraged individuals to take personal responsibility for saving towards their own retirement.

Variable rate annuities were invented in the 1950's and offered slightly higher returns at times along with a higher risk on the purchaser's end. Variable annuities, such as mutual funds, also allowed individual investors to decide which particular funds they were interested in buying and gave a greater range of choice in where people could put their money. Throughout the history of annuities in the United States, one of their most appreciated benefits has been their tax deferred status. Due to insurance companies being the entities that issue annuities, the money value that was accrued over time is not needed to be reported on a year-to-year basis.

Despite the humble and simple beginning of annuities in the Roman Empire, they have become increasingly diverse and more complex to suite the financial needs of more individuals. Relying on one type of savings plan has proven to be more and more difficult as the financial climate continues to shift and annuities continue to gain in popularity and versatility for virtually every type of investor.

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