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Annuities in the United States

Annuities made their first mark in America during the 18th century. In 1759, a company in Pennsylvania was formed to benefit Presbyterian ministers and their families. Ministers would contribute to the fund, in exchange for lifetime payments. It wasn’t until 1912 that Americans could buy annuities outside of a group. The Pennsylvania Company for Insurance on Lives and Granting Annuities was the very first American company to offer annuities to the general public.

Annuities constituted a small share of the U.S. insurance market until the 1930s, when two developments contributed to their growth. First, concerns about the stability of the financial system drove investors to products offered by insurance companies, which were perceived to be stable institutions that could make the payouts that annuities promised.

Flexible payment deferred annuities, which permit investors to save and accumulate assets as well as draw down principal, grew rapidly in this period. Second, the group annuity market for corporate pension plans began to develop in the 1930s.

The entire country was experiencing a new emphasis saving for a “rainy day.” The New Deal Program introduced by President Franklin D. Roosevelt (FDR) unveiled several programs that encouraged individuals to save for their own retirement. Annuities benefited from this new-found savings enthusiasm.

By today’s standard, the first modern-day annuities were quite simple. These contracts guaranteed a return of principal, and offered a fixed rate of return from the insurance company during the accumulation period (Fixed Annuity). When it was time to withdraw from the annuity, you could choose a fixed income for life, or payments over a set number of years. There were few bells and whistles to choose from. What was always proved to be attractive about annuities was their tax-deferred status because they were issued by insurance companies.

That all changed beginning in 1952, when the first variable annuity was created by the College Retirement Equities Fund (CREF) to supplement a fixed-dollar annuity in financing retirement pensions for teachers. Variable annuities credited interest based on the performance of separate accounts inside the annuity. Variable annuity owners could choose what type of accounts they wanted to use, and often received modest guarantees from the issuer, in exchange for greater risks they (the owner) assumed. This type of annuity was then made available to any individual, when the Variable Life Insurance Company (VALIC) in 1960, began to market its own nonqualified variable annuity. It was the variable annuity that boosted the popularity of annuities. Then in 1994, Keyport Life Insurance Company introduced a new type of a fixed annuity called an index annuity. And the rest is history.

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