The history of annuities is one of growth and innovation. The original concept evolved from A.D. 222 when Roman scholar Ulpianis was credited with developing the first actuarial table. This progressed into individuals making large payments into an annua , (Latin for annual stipend) to receive annual payments till death or for a specified period.
Roman soldiers were paid an annua to compensate for their service. From then on, into the Middle Ages, society continued to use pools of cash to pay individuals dividends or stipends until death, with the proceeds of these programs paying for wars or public works.
In 1720, the
Today, we see annuities being used frequently for a variety of reasons. Certain annuity products and their complexities present unique challenges to advisors in this day and age, but they also present numerous opportunities to make solutions for the right type of client.
A few of the benefits annuities can provide include safety of principal, opportunity for growth of funds invested with the insurance company, diversification, guaranteed lifetime income and significant income tax advantages. One key additional benefit in variable annuities is the ability to exchange sub-accounts with no current income tax consequences and at low or no cost.
Today's annuities come from a long road of transformation. I will help shine a light on their evolution and identify some of the advantages that have successfully been used by our firm for more than 35 years to solve specific client goals and objectives.
In 1653 France, under Louis XIV, an Italian banker named Lorenzo DeTonti implemented an investment plan for raising capital, likely borrowed from ancient
In 1913, the 16th Amendment to the United States Constitution allowed
In the 1950s, U.S. life insurance companies started issuing deferred and immediate annuities. They typically were for large cases and had many fees and charges. In 1963, a company in
By the late 1970s the modern no-load variable annuity had been developed. Prior to this time, most annuities were front-loaded, similar to an A-share mutual fund. By contrast, no-load annuities have a contingent deferred sales charge that's applied to redemptions within the sales charge period; which is typically five to 10 years. The Spectrum variable annuity was a no front-load annuity that had a contingent sales charge within it. In 1978 the Spectrum variable annuity had deposits of
Rev. Rul. 81-225 required an owner of a variable annuity contract to have a separate account, meaning you could not offer a publicly available mutual fund within the variable annuity. To be sure, a company could clone a mutual fund and offer it within the insurance product. However, it could not be the exact same fund — separate account only.
In the 1990s variable annuities hit their stride, taking in
Will adverse rulings or new laws change these plans once again? Based on history, it is highly likely we will see continued change on this front.
Today, fixed indexed annuities offer a formula-based crediting of excess interest by the issuing company. This differs from a fixed non-indexed annuity where excess interest is determined by the company from time to time and usually at the discretion of the company's board. It's the difference between "we may pay excess interest" and "we will pay excess interest."
But who makes this call? What guidance and theories are best to use as direction for the allocation among the various choices? Some plans have hundreds of sub-accounts. Many advisors rely on third-party asset managers (RIAs) for this vital function. This non-core activity can be outsourced for efficiency and represents a cost-effective way to meet a critical function. By partnering with a proven RIA, the advisor can concentrate on gathering assets and other critical core functions and activities.
Even through all these changes, the variable annuity remains a solid planning tool for advisors and clients. Advisors need to make sense of all this variety in a solid and systematic way to develop appropriate and suitable allocation models across their clients various risk profiles.
The evolution of today's modern annuity products benefited from DeTonti's early framework; it helped financial professionals become more efficient and client-focused. The future of annuities may change as government and economic forces shift, but these products will continue adapting to suit the needs of our clients as we help them address their goals and objectives.
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