The Earlier Times of Annuities

Annuities are one of the hottest forms of investments right now. But before you think that it is only now that it is enjoying its soaring popularity, think again. You might be in for a surprise—the roots of annuities can be traced back as early as the Roman times.

The root word of the word annuity comes from the Latin word 'annua' which is a term used in the emperor's time to indicate a contract for annual stipends. What happens is that Romans make a one time payment to their annua, in exchange of lifetime fees made once a year.

In the 17th century, an annuity is used as effective fundraising vehicle of many countries, especially in Europe. Since the government is constantly looking for revenues to cover payment for wide spread battles with their neighboring countries, they created 'tontine'. Back in those times, a tontine promises to pay citizens for an extended period of time if they will purchase some shares.

In 1963, since the United Kingdom was locked in many wars with France, they started what will be known in history as the first group annuity—the State of Tontine. Members then will purchase a share of GBP 100 from the UK government. In return, the nominated person of the shareholder (often children) will receive an annuity during their lifetime. This is what we now call the beneficiary or heir for annuities with death benefits.

Because nominees kept on dying, the amounting annuity for the remaining shareholders becomes larger and larger. In tontines, the growth and division of this wealth will continue until there were no living nominees to receive the annuity benefit.

It was in the mid 1700's when annuities first entered the American market in 18th century. It was exclusively offered by a company in Pennsylvania established by Presbyterian ministers, together with their families and it was only in early 1900 that Americans can buy annuities outside of the said group.

Even by today's standards, the principles of the first modern annuity are simple: investors are offered a fixed rate of return from their respective insurance company and they are also guaranteed with the return of their principal investments. Should it be time for the investor to withdraw their money, they can choose to receive it either as a fixed income for life (usually a retirement package) or series of payments over a set number of years. However, be that as it may, due to the lack of choices in an old school annuity, more options and features in such investment fueled the development of the annuities that we know of today.

At present, annuity investments are a USD 200 billion industry. Moreover, while they might prove to normally have higher fees or commissions than other range of investments, there are pretty good reasons why—their benefits and more have been used by many investors to their advantage.