"History of Annuities"

Annuities are extraordinarily popular in modern times, but they're not new. In fact, annuities can actually trace their origins back to Roman times.

Contracts during the Emperor's time were known as annua, or "annual stipends" in Latin. Back then, Roman citizens would make a one-time payment to the annua, in exchange for lifetime payments made once a year.

During the 17th century, annuities were used as fundraising vehicles. In Europe, governments were constantly looking for revenue to pay for massive, on-going battles with neighboring countries. The governments would then create a tontine, promising to pay for an extended period of time if citizens would purchase shares today.

The United Kingdom, locked in many wars with France, started one of the first group annuity called the State Tontine of 1693.

As each nominee died, the annuity for the remaining proprietors gradually became larger and larger. This growth and division of wealth would continue until there were no nominees left.

Proprietors could assign their annuities to other parties by deed or will, or they passed on at death to the next of kin.

Annuities made their first mark in America during the 18th century. In 1759, a company in Pennsylvania was formed to benefit presbyterian ministers and their families. Ministers would contribute to the fund, in exchange for lifetime payments.

It wasn't until 1912 that Americans could buy annuities outside of a group. The Pennsylvania Company for Insurance on Lives and Granting Annuities was the very first American company to offer annuities to the general public.

Annuity growth from that point on was steady, but annuities really started to catch on in the late 1930s. Concerns about the overall health of the financial markets prompted many individuals to purchase products from insurance companies. In the midst of the Great Depression, insurance companies were seen as stable institutions that could make the payouts that annuities promised.

The entire country was experiencing a new emphasis on saving for a "rainy day." The New Deal Program introduced by FDR unveiled several programs that encouraged individuals to save for their own retirement. It was around this time, too, that group annuities for corporate pension plans really developed. Annuities benefitted from this new-found savings enthusiasm.

By today's standards, the first modern-day annuities were quite simple. These contracts guaranteed a return of principal, and offered a fixed rate of return from the insurance company during the accumulation period. When it was time to withdraw from the annuity, you could choose a fixed income for life, or payments over a set number of years. There were few bells and whistles to choose from.

What was always proved to be attractive about annuities was their Tax Deferred status. Because they were issued by insurance companies, annuities were always able to accumulate without taxes being taken out at year-end. This allowed annuity owners to put the time value of money on their side.

Then, in 1952, the first variable annuity was created. Variable annuities credited interest based on the performance of separate accounts inside the annuity. Variable annuity owners could choose what type of accounts they wanted to use, and often received modest guarantees from the issuer, in exchange for greater risks they assumed.

Over the years, more features were added to annuities. Some contracts provided checkbook access to funds. Other annuities provided enhanced "bonus" rates, shorter maturity periods, and guaranteed death benefits if the owner passed away unexpectedly.

What really boosted the popularity of annuities were the variable accounts. Mutual funds have mushroomed in popularity over the past two decades. In fact, there are almost twice as many mutual funds as there are stocks.

Fund managers, eyeing the growing annuity marketplace, began creating separate accounts that insurance companies could use for annuity premiums. These accounts were managed in a similar fashion to their mutual fund counterparts, but were designed specifically for use in tax-deferred variable annuities.

LIMRA, an independent service that tracks the insurance industry, reported that fixed and variable annuity sales amounted to $98.5 billion in 1995. By 1999, that figure had ballooned to $155 billion. A huge portion of that growth was in variable annuities.

Today, annuities are as popular as ever, with annual annuity sales estimated to be over $200 billion. And while annuity contracts typically have higher fees and commissions that other investments, millions of retirement-minded investors have been able to use the annuity structure to their advantage.

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