What is an Annuity?
In the United States, an annuity is a structured insurance product that each state approves and regulates. It is designed using a mortality table and mainly guaranteed by a life insurer. There are many different varieties of annuities sold by insurance companies.
History of Annuities
The early 1900s gave the American public its first shot at annuities, when the Pennsylvania Company for Insurance on Lives began offering them in 1912. Growth remained slow but steady until the Great Depression. In the late 1930s, investors placed more trust in insurance companies than in banks. FDR’s New Deal also placed great emphasis on savings, and the public responded. Even corporations got involved, developing group annuities for pension plans.
These early public annuity offerings offered fixed rates, tax-deferred status and a guaranteed return. Clients had two options for payment: fixed income for life or payments throughout a given number of years.
THE PRIMARY BENEFITS OF ANNUITIES
Retirement annuities are unlike any other investment vehicle. Their key purpose is to provide immediate income for life with tax deferral and repayment guarantees.
Fixed or variable contracts (chosen based on the owner’s risk tolerance) allow you to invest underlying capital on a tax-deferred basis with the potential of earning higher-than-average returns. An annuity should be considered a portion of an investment portfolio or stable retirement plan.
Retirement annuities are backed by larger insurance companies. The company must be scrutinized and licensed by individual states (as do the planners that provide these products). The insurance commissioners from each state evaluate the insurance company to guarantee they have reserve money to back up the investment. This is known as the State Guaranty Fund. It is an extra layer of protection provided for investors. This Guaranty Fund is different in each state and can be as high as a half million dollars. A quick word of warning – this protection exists for fixed-rate annuity holders only. Variable annuities are excluded from State Guaranty Fund protection.