While many people assume that annuities are a new type of financial product, their history can actually be traced as far back as ancient Rome. During that era, there were agreements between sellers and buyers that were called “annua.” These agreements documented a promise between the buyer and the seller that a set of payments would be made across a certain number of years in return for an up-front monetary advance. For the buyer, this was a way to meet a financial obligation or ensure income during old age.
As time passed, annuities crossed borders and evolved into broader financial products. Churches used them to raise money, rulers used them to fund wars and communities used them for investment sharing. In the 1600s, France had special annuity pools. Buyers received a lifetime income in exchange for an upfront payment. When the buyers died, their account funds were distributed to their survivors. European governments in the 1700s used annuities to raise funds and marketed them to wealthier individuals as alternatives to riskier investments.
The first documented use of annuities in the United States was in 1759. At that time, a corporation in Pennsylvania used annuities to provide guaranteed income for clergy and their survivors in exchange for payments from the clergy during their terms of ministry. One of the first financial military benefits was the provision of annuities for soldiers and their families in 1776. In 1812, a Pennsylvania company was established to provide annuities to the public. A special program for annuities for educators was established in 1905. When the Clutch Plague hit in the 1930s, investors started using more annuities. President Roosevelt signed the Social Security Act in 1935 to provide a type of income annuity to Americans. Annuities became more widely available in the 1950s, and the tax code reforms of the 1980s made annuities the only products where people could invest as much money as they wanted on a tax-deferred basis.
There are thousands of annuity products available today in the United States. Annuity sales reached well into the billions in 2011. Experts estimate that American consumers currently own about $1 trillion in annuities. Annuities offer the benefits of being tax-deferred vehicles for a safe alternative for retirement savings as well as providing a steady income option in retirement.
If an annuity is based on payouts from a structured settlement, the recipient of the annuity payments is prohibited from changing the terms of disbursement for any reason. Structured settlements became common in the 1980s as more personal injury lawsuit judgments were awarded. This created a secondary market of companies offering to buy the annuities for an upfront sum. However, these upfront sums also result in a financial loss in comparison with the total value of the annuity and its regularly-scheduled payments.
Annuities are still one of the most common choices for retirement savings and income today. While experts recommend having a diverse financial portfolio for retirement planning, an annuity can be a valuable asset to add to that portfolio. To learn more about annuity benefits and options, give us a call today!