Annuity (American)

In the United States, an annuity is a contractually executed, relatively low-risk investment product, where the insured (usually, an individual) pays a life insurance company a lump-sum premium at the start of the contract. That money is to be paid back to the insured in fixed, incremental amounts, over some future period (predetermined by the insured). The insurer invests the premium; the resulting profit/return on investment funds the payments received by the insured and compensate the insurer. Conventional annuity contracts provide a predictable, guaranteed stream of future income (e.g., for retirement) until the death(s) of the beneficiaries(s) named in the contract, or, until a future termination date — whichever occurs first.

Although annuities have existed in their present form only for a few decades, the idea of paying out a stream of income to an individual or family dates back to the Roman Empire. The Latin word annua meant annual stipends, and during the reign of the emperors, the word signified a contract that made annual payments. Individuals would make a single large payment into the annua and then receive an annual payment each year until death, or for a specified period of time. The Roman speculator and jurist Gnaeus Domitius Annius Ulpianus is cited as one of the earliest dealers of these annuities, and he is also credited with creating the first actuarial life table. Roman soldiers were paid annuities as a form of compensation for military service. During the Middle Ages, annuities were used by feudal lords and kings to help cover the heavy costs of their constant wars and conflicts with each other. At this time, annuities were offered in the form of a tontine, or a large pool of cash from which payments were made to investors.

One of the early recorded uses of annuities in the United States was by the Presbyterian Church in 1720. The purpose was to provide a secure retirement to aging ministers and their families, and was later expanded to assist widows and orphans. In 1912, Pennsylvania Company Insurance was among the first to begin offering annuities to the general public in the United States. Some prominent figures who are noted for their use of annuities include: Benjamin Franklin assisting the cities of Boston and Philadelphia; Babe Ruth avoiding losses during the great depression, O. J. Simpson protecting his income from lawsuits and creditors. Ben Bernanke in 2006 disclosed that his major financial assets are two annuities.

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