Today we’re going to teach you a brief history of annuities. Because of the connection with retirement, one might assume that annuities are a more recent phenomenon. In reality, its origins can be traced all the way back to the Roman Empire.
In the Beginning
During the Roman Empire, buyers and sellers entered into contracts that were called “annua” in Latin — which was the predecessor of the English word annual. Similar to what annuities today are like, “annua involved a buyer paying a lump sum to a seller who would later make annual payments to the buyer each year until the buyer passed,” writes Steve Jurich, aka My Annuity Guy.
“As is often the case, necessity was the mother of this invention,” adds Jurich. “Sellers were unable to predict the lifespan of buyers, which is necessary knowledge to create the terms of the annua contracts.” As such, the endgame “was to make enough of a profit on the annua whose buyers passed before the full payout and therefore cover the losses experienced on those whose lives surpassed the original contract.”
But, there was another beneficiary of annua. And, this was the “Roman soldier who received military service compensation in the form of annual stipends,” says Jurich. “Governments and militaries would repeat this practice many times throughout the coming centuries.”
The Middle Ages
Fast forward to the Middle Ages. During this period, there was a new use for annuities for Europeans. And, just like today, it was funding expensive war coffers.
“Kings and feudal lords sought investors as financial backers for their conflicts,” explains Jurich. As such, they placed “these contributions into a tontine.” That means that “investors received payments from the pool.” However, after investors passed away “the remaining investors split their shares, continuing until only one investor remained and received all remaining monies in the tontine.”
“Europeans continued using annuities in later years, expanding the concept” that resemble something more closely to what annuities are like today. The reason? It served “as a kind of savings account offering a guaranteed income.”
Here’s where things got interesting. “Those issuers offering annuities to royalty soon realized their titled patrons lived much longer lives than the public did,” clarifies Jurich. “Pricing adjustments quickly followed.”
Annuities in the New World
Obviously, this concept was not reflected just in Europe. In 1759, it finally reached the shores of the New World. Specifically, in Pennsylvania.
During the 18th Century, pastors were the first known Americans to receive annuities. These were “funded by donations from their congregants and church leaders,” states Jurich. In fact, any funds that widows or orphans receive have their origins in these types of annuities.
“Benjamin Franklin provides an excellent example of the potential longevity of an annuity,” notes Jurich. “In his will, Franklin left annuities to” both Boston and Philadelphia. “For over 200 years, all the way through to the early 1990s, Franklin’s annuity to Boston continued paying and only stopped when the city opted to receive the remaining balance in a lump-sum distribution.”
Despite this, “Americans in the late 18th century mostly rejected the idea of annuities, preferring to rely on the generosity of family in their golden years.” Who were the main proponents of annuities at this time? It was typically “attorneys and estate planners, who saw the value of an annuity in fulfilling the final wishes of clients,” Jurich explains.
1812 was a landmark year when it came towards annuities — outside of a little war known appropriately as the War of 1812. As previously before, It involved Pennsylvania. In this case, a life insurance company that offered annuity contracts. “Nearly half a century later, Union soldiers had the choice of receiving compensation in the form of an annuity,” says Jurich.
20th Century Annuity
It wasn’t until the early 20th Century when the American public could finally get a crack at annuities. It took place “when the Pennsylvania Company for Insurance on Lives began offering them in 1912,” writes Jurich. “Growth remained slow but steady until the Great Depression.”
However, following the Great Depression, “investors placed more trust in insurance companies than in banks.” Thanks to FDR’s New Deal there was a greater emphasis on savings, which the public overwhelmingly responded to. It was so popular that corporations threw their hat in the ring and developed group annuities for pension plans.
“These early public annuity offerings offered fixed rates, tax-deferred status, and a guaranteed return,” Jurich writes. “Clients had two options for payment: fixed income for life or payments throughout a given number of years.”
In 1952, variable annuities arrived. As a result, this let owners choose their account type. But, it wasn’t until the 1980s, where indexed annuities came into the picture.
Variable annuities offered even more diversity. In fact, Congress was all about annuities with the passage of the 1982 Periodic Payment Settlement Act. As a consequence, this “exempted structured settlement payments from taxes,” explains Jurich. “Through the remaining years of the 20th century, annuities kept growing in complexity.”
Annuities in the 21st Century
After entering a new century, a wide variety of available products and new features became available. Most notably were principal guarantees and long-term care benefits. Mainly this was to appease critics and address the popularity of annuities.
The result? Well, in 2000 if you were 65 years old and had $100,000 in savings then you could purchase an annuity that guaranteed an income of $744 per month.
Even sweeter? Annuity sales reached a record by 2019. The reason? The economic condition was favorable following the Great Recession.
Unfortunately, rates plummeted in 2020 and 2021.
To put that in perspective, that $744 you may have received in 2000 is now just $469. That’s actually less than half that in 1990.
“They’re a function of interest rates,” says Rob DeHollander, a financial adviser with DeHollander & Janse Financial Group told MarketWatch. “I remember when you could go to the bank and get a CD [certificate of deposit] that was paying 5% or 6%, but those rates are long gone.” If you buy a single premium annuity here, he says, “you’re locking in rates that are as low as they’ve ever been.”
“For people who want steady income, and want safety, annuities have usually been pretty good,” added Chris Chen, a planner with Insight Financial Strategists in Newton, Mass. “But with interest rates pushing to zero, there isn’t that much advantage anymore. You’re locking away your money and you’re not getting any return.”
In other words, collapsing inflation and low-interest rates are to blame. But, will they bounce back?