By Dan Schulte, Senior Vice President and Manager, Annuities and Insurance
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Modern-day annuities are contractual products that are issued and designed by insurance companies that can provide guaranteed income for a period of years or for life. Did you know that similar types of arrangements have been used for centuries?
Annuities date back to the Roman Empire, where they were used as insurance for government employees. During that time, the idea of guaranteed income was known as an “annua,” which is Latin for annual stipends. In exchange for making a one-time payment to the government, Roman citizens would receive lifetime payments each year from the annua.*
In 17th century Europe, annuities evolved into “tontines,” which were used by governments to fund wars and various construction projects. These strategies would pay income for life and would actually increase payments to surviving family members.*
In 1759, the concept of annuities arrived in Pennsylvania where annuity payments were offered to widows and orphans of Presbyterian ministers. In 1812, The Pennsylvania Company for Insurance on Lives and Granting Annuities was the first American company to offer annuities to the public-at-large. Even the legendary Ben Franklin saw the value of leaving annuity income in his will to the cities of Boston and Philadelphia that continued through the early 1990s.*
During the Civil War, annuities often were awarded by the U.S. government to military members. President Lincoln supported the idea before his death as a method of assisting injured or disabled military personnel.**
In the United States, annuities held a small share of the U.S. insurance market until the 1930s. The Great Depression caused investors to consider annuities as a safe haven to volatile markets. During this time, even the great Babe Ruth used annuities and was quoted saying: “I may take risks in life, but I will never risk my money, I use annuities, and I never have to worry about my money.”**
Annuities have greatly evolved since their inception in early Roman times, but one constant is that they still offer income guarantees that are available in no other product. Planning your retirement by balancing lifetime income needs and longevity can be challenging. If you are facing this issue, you may wish to consider transferring some of your assets to an insurance company in exchange for an annuity.
Annuity contracts issued by insurance companies can be structured to provide lifetime guaranteed income for you (and your spouse, if applicable) regardless of how long you live. The amount of the income guaranteed by the contract will vary by company and is based on life expectancy and the types of income feature purchased. Contracts can be structured for income now or income later and can be funded with a single premium or multiple premiums.
The older you are when income begins, and the longer you defer taking income, the higher the guaranteed income stream. Funding an annuity gives assurances that regardless of what happens in the marketplace, the insurance company can provide a guaranteed lifetime income stream.***
Annuities are long-term investments and will often have surrender charges, as well as other fees and expenses, so you should be careful not to invest all your liquid net worth into annuity contracts. Because of the complexity of annuities, you should understand the features, risks and costs prior to making a purchase. Your financial advisor can help you analyze your situation and discuss various options to consider as a complement to your portfolio.
*Source: Safemoney.com
**Source: Emporiagazette.com
*** All annuity guarantees are subject to the claims-paying ability of the issuing company.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.