Though popular among today’s aging Baby Boomers and members of Mature or “Senior” markets, annuities can be traced back to ancient Greece. The term “annuity” comes from Greek word “annus”—or “year”—and refers to annual income payments. Similarly, in ancient Rome citizens would make one-time payments to a contract called “annua” in exchange for lifetime payments made once a year.

In 17th century Europe, annuities were used as fundraising devices by governments to finance their ongoing wars with neighboring nations. These governments would offer “tontines,” which promised payments into future to those who bought shares.

In 18th century annuities were introduced to North America, with private insurance companies selling insurance and annuity contracts to individuals wanting to avoid outliving their resources, In 1759 in Pennsylvania a company was formed to benefit Presbyterian ministers and their families. The ministers would contribute to a fund, in exchange for lifetime payments. In 1912, Pennsylvania Company for Insurance on Lives and Granting Annuities became first American company to offer annuities to public.

However, annuities experienced a huge growth in popularity during late 1930s when collapsing financial markets turned many people away from equities in favor of products from more secure institutions—insurance companies that could and did make annuity payments, as promised.

Early annuities were simple contracts guaranteeing a return of principal and fixed rates of return from insurance company during accumulation phase. At withdrawal, annuitant chose either a fixed income for life or payments over a specific number of years. Buyers have always been drawn to annuities by their tax-deferred status. As a consequence of being issued by insurance companies, annuities have always been able to accumulate without taxes being taken out at year-end, which has added time value of money to their list of advantages.

The most recent major development has been inception in 1952 of variable annuities, which offer investment features of separate mutual fund accounts inside annuity with tax-deferral available from life insurance products. Variable Annuity owners choose type of accounts to use, often receiving modest guarantees from issuer in exchange for greater risks assumed.

“The shift to investment-linked annuities has been so marked that 25,000 investment-linked annuities were sold [in 2001] - 9.5% of all annuity business,” reports Peter Quinton is managing director of The Annuity Bureau, adding that “it's likely that popularity of these annuity will continue to increase as they are only at-retirement products that offer retirees a half-way house between two extremes of purchasing a safe conventional annuity and opting for a investment-linked income drawdown plan, where cross-subsidy system does not apply.” Source: Pensions Management; 12/1/2002

Wider Choices

Although long part of well-diversified financial portfolios, annuities have continued to evolve. Recent developments have included features such as adding checkbook access to Variable Annuity funds, more attractive "bonus" rates, shorter maturity periods, and guaranteed death benefits.

But consumers now have wider choices of annuity types, plus more investment options and guarantees to fit their investment and income goals. For example, some annuities offer guaranteed bonus interest rates for first few years or guaranteed returns for life of contract. Other annuities guarantee beneficiaries return of principal if annuitant dies and annuity stock market investments have lost value.