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Making Sense Out of Dollars

“A” is for Annuities

Part 3 of 17

Joel Lerner
Posted 1/28/22

What is the History of Annuities in America?

Annuities made their first mark in America during the 18th century. In 1759, a company in Pennsylvania was formed to benefit Presbyterian ministers and …

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Making Sense Out of Dollars

“A” is for Annuities

Part 3 of 17

Posted

What is the History of Annuities in America?

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 the 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 and annuities benefited 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 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.
LIMRA, an independent service that tracks the insurance industry reported that annuity sales amounted to $98.5 billion in 1995. By 2020 that figure had ballooned to $2.5 trillion as a huge portion of that growth was in variable annuities.
Today, annuities are as popular as ever, with annual sales estimated to be over $200 billion. And while annuity contracts typically have higher fees and commissions than other investments, millions of retirement-minded investors have been able to use the annuity structure to their advantage.

Thought For The Week

We all love ourselves more than other people but care more about their opinions than our own.

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