Most people think of annuities as a modern income/investment vehicle. Nothing could be further from the truth. So what is an annuity? Although the annuity products of today differ quite a bit from their historical beginnings, the idea of paying out a flow or stream of income to a person or even a family dates back to the Roman Empire. In fact, the word annuity comes from the Latin word “annua” which meant annual stipends. During the reign of the Roman emperors, the word indicated the existence of a contract that made annual payments. It was common for wealthier Romans to make a single large payment into an annua and then receive an annual payment either for their lifetime or for a specified period of time – showing a clear link to the annuity income products offered today.
One of the earliest dealers in the Roman form of ‘annuity’, or annua, was speculator and jurist Gnaeus Domitius Annius Ulpianis. In addition to selling annuities, he is also cited as being the father of actuaries as he created the first actuarial table to help in determining the life expectancy of his investors.
What Is an Annuity Payment? Examples Throughout HistoryRoman soldiers endured long years of military service and were paid annuities as a form of remuneration for their service. In the Middle Ages annuities were used by lords and kings to help pay the costs of their seemingly endless wars and conflicts with each other. It was during this time that annuities became known as tontines or large pools of money used to make payments to their investors. In the US, the history of annuities goes back to 1720 and the Presbyterian Church which used annuities to provide its aging ministers with the means of retiring and later in assisting widows and orphans. Indeed, Benjamin Franklin used an annuity to assist the cities of Philadelphia and Boston in troubled financial times. Today, annuity investments continue to grow in popularity and have proved their value as people look for more secure ways to guarantee their retirement income.
How Does An Annuity Work?There are two basic types: a “fixed annuity” (or guaranteed) and a “variable annuity“. In a fixed annuity, an individual’s funds are invested in an insurance company’s general account, which typically contains very safe fixed income securities like bonds. The insurance company assumes all the investment risk, not the contract holder, formally called the annuitant. Fixed annuities are very attractive since they offer a guaranteed payment, whose payout amount is based on the anticipated future returns of the insurance company’s investments and the annuitant’s life expectancy.
Variable annuities allow the contract owner to invest in both fixed-income and stock-based accounts. The value of these variable annuity accounts will change depending on the performance of the investments underlying the accounts. Variable annuities are attractive to some because of the potential for higher long-term returns over fixed annuities. But the payouts of variable annuities will fluctuate, sometimes dramatically, from year to year.Investors who are more conservative with their investments often view these ups and downs as disadvantages of an annuity. And unlike fixed annuities, the contract holder of a variable annuity assumes all the risk.
Now that we’ve covered “What is an annuity?” there is, of course, far more to learn about the types of annuities and the various “sub-types” within the two basic kinds. Here at Annuities HQ you can research, connect and invest in an annuity quickly and easily.
By Michael Lewis
Share111 Tweet69 Pin1Comments10
For many people, their first experience with life insurance is when a friend or acquaintance gets an insurance license. In my case, a college friend, recently hired by a major insurance company, contacted me (along with all of his other friends) to buy a $10,000 policy underwritten by his company.
Unfortunately, however, this is how most people acquire life insurance – they don’t buy it, it is sold to them. But is life insurance something that you truly need, or is it merely an inconvenience shoved under your nose by a salesperson? While it may seem like the latter is true, there are actually many reasons why you should purchase life insurance.
Reasons to Buy Life InsuranceAs I grew older, got married, started a family, and began a business, I realized that life insurance was indispensable and fundamental to a sound financial plan. Over the years, life insurance has given me peace of mind knowing that money would be available to protect my family and estate in a number of ways, including:
1. To Pay Final Expenses
The cost of a funeral and burial can easily run into the tens of thousands of dollars, and I don’t want my wife, parents, or children to suffer financially in addition to emotionally at my death.
2. To Cover Children’s Expenses
Like most fathers, I want to be sure my kids are well taken care of and can afford a quality college education. For this reason, additional coverage is absolutely essential while my kids are still at home.
3. To Replace the Spouse’s Income
If my wife had passed away while the kids were young, I would’ve needed to replace her income, which was essential to our lifestyle. I also would’ve needed to hire help for domestic tasks we’d shared like cleaning the house, laundry, cooking, helping with schoolwork, and carting kids to doctor’s visits.
4. To Pay Off Debts
In addition to providing income to cover everyday living expenses, my family would need insurance to cover debts like the mortgage so they wouldn’t have to sell the house to stay solvent.
5. To Buy a Business Partner’s Shares
Since I’m involved in a business partnership, I need insurance on my partner’s life. The reason is so if he dies, I will have enough cash to buy his interest from his heirs and pay his share of the company’s obligations without having to sell the company itself. He has the same needs (due to the risk that I might die), and he simultaneously purchased insurance on my life.
6. To Pay Off Estate Taxes
Estate taxes can be steep, so having insurance in place to pay them is essential to avoid jeopardizing assets or funds built for retirement. Use of insurance for this purpose is most common in large estates, and uses permanent (rather than term) insurance to ensure that coverage remains until the end of life.
How Much Coverage Should I Buy?
The face amount, or “death benefit” of an insurance policy (i.e., the amount of proceeds paid to the beneficiary) should be high enough to replace the after-tax income you would have earned had you lived a full life, presuming you can afford the annual premiums for that amount. In other words, the insurance replaces the income you didn’t have the chance to earn by living and working until retirement due to a premature death.
The proper amount of insurance allows your family to continue their lifestyle, even though your income is no longer available. The actual amount that you should purchase depends upon your present and probable future incomes, any special circumstances affecting you or your family, and your existing budget for premiums.
Whole Life or Term?
Some people prefer to drive Cadillacs or Mercedes, which come with all of the electronic gadgets that make driving safe and as easy as possible. Others prefer less customized makes, equally reliable to their more expensive cousins, but requiring more hands-on attention.
Whole life is the “Cadillac” of insurance; its sponsors try to do everything for you, specifically investing a portion of your premiums so that the annual cost doesn’t increase as you grow older. The investment characteristic of the insurance means that premiums are generally higher than a similar term policy with the same face value. After all, whole life insurance is intended to cover your whole life.
Term insurance, on the other hand, is a stripped-down model of life insurance. There are no excess premiums to be invested, and no promises or guarantees beyond the end of the term, which can range from 1 to 30 years. The annual premium for term insurance is always less than whole life, lacking the investment component, but your premiums will rise (often substantially) once the term period expires.
Both types of life insurance policies (or one of their derivatives) have benefits and drawbacks; both have their place depending upon the needs, desires, and financial objectives of the purchaser. A knowledgeable professional insurance agent can help you decide which type of policy is best for you depending upon your circumstances. But whichever you select, be sure that you have enough coverage to meet your objectives in the short term and the long term. During my lifetime, I have spent thousands of dollars in premiums for life insurance of both types and I have never regretted a single penny of the expense.
Final WordSome people mistakenly believe that life insurance is a scam. This is due to the fact that the money for premiums is lost if death doesn’t occur during the coverage period (in the case of term insurance), or because many people live to a ripe old age and continue to pay their permanent insurance premiums. Such naysayers compare life insurance protection to gambling, and forgo the protection entirely.
Of course, there is no bet – you will die, but no one knows when. It could be today, tomorrow, or 50 years into the future, but it will happen eventually. Life insurance protects your heirs from the unknowable and helps them through an otherwise difficult time of loss.
Do you have life insurance? Why or why not?