| Annuities |
Annuities date back to Roman times when a payment was made for a 'annua' or annual stipend. The 'annua' served to help various Roman projects from training their armies to building aqua ducts. The immediate source of cash paid for the 'annua' funded the various projects. In return the buyer of the annua received an annual stipend.
This created a secondary market whereby other businessman would purchase the annua at a discount from the annual stipend rate and thus cash out the original buyer providing them immediate cash for whatever emergency had arisen.
 Interestingly, annuities slogged along and in the 17th and 18th centuries were in essence providing similar funding for various European countries and England being the source of how annuities eventually arrived in America.
Annuities were not a popular financial product up until the early 1930's when those who still had cash no longer trusted the banks and annuities gained considerable prevalence in the financial marketplace.
Annuities were both deferred and immediate. Deferred being a specified fixed rate would be applied to the principal and immediate whereby the annuitant would receive immediate payments in return for a specified amount of cash premium being paid.
In the 1950's variable annuities came along and once again the marketplace for annuities was tepid at best.
The long drought of the 70's and early 80's helped fuel annuity sales and naturally the government had a close eye on both the taxation, distribution and transformation of the annuity marketplace. Life insurance was also reformed so as to prevent limitless funding of life policy premiums as distributions in later years are considered tax-free based on FIFO (first in, first out).
Today annuities come in 3 basic flavors.
 There is the traditional fixed rate annuity whereby the underlying company sets the interest rate paid each year.
There is the variable annuity which came out in the 50's and has gone through numerous transformations with the positives still being the consumer has a choice of sub accounts which look like mutual funds but in fact are not due to the governments requirements that all variable annuity funds must be kept in separate accounts. The market goes up and most likely your variable annuity goes up based on the sub accounts chosen. The market goes down and the sub account value in your variable annuity goes down as well.
Over the years many companies have come out with a slew of riders that offer numerous guarantees but all at a cost and that cost can be exorbitant in some.
Lastly, in the mid 90's the annuity marketplace came out with a fixed indexed annuity, commonly called equity indexed annuities. The equity indexed annuity is what we chose as our annuity product of choice for our brokers and clientele based primarily on the fact that after extensive review with the situation being if we were going to buy an annuity product or sell one to our mother or father, which product would we sell.
The equity indexed annuity was chosen by every reviewer and outside third party consultants based on three simple features:
• You cannot lose your principal
• You can choose numerous indexes to allocate your principal to
• The negative was acceptable - you could only reach an agreed upon maximum gain based upon the company and contract.
And to this day, when a client thinks they know the product they want and we do a simple yellow pad presentation going over the pro's and con's of the 3 annuity choices; concluding the presentation by turning the pad towards the client and asking them which product sounds best to them? With rare exception, most folks over 40 point to the equity indexed annuity and willingly give up possible 25% or 50% gains in return for the fact their principal has no downside and some companies even guarantee a 1% or 2% minimum in a bad year. Case in point, 10/9/07 the Dow stood at 14,164; one year later on 10/10/08 the Dow was 7882.
If you put $500,000 in an equity indexed annuity on 10/5/07 the following year you would have had NO GAIN and NO LOSS OF PRINCIPAL. The annuity would have reset on its anniversary of 10/5/08 and your new point would have been around 7880. On 10/5/09 you would have had a very nice year. As well as the following the year. And if you awoke one morning to hear the market fell off a cliff again, you would have the comfort of knowing your principal and gains were locked in and safe.
Immediate annuities have their place as well and often when a client is past a certain age and concerned over a consistent flow of cash we recommend immediate annuities and/or a combination of immediate annuity and equity indexed annuity.
Annuities are not tax free but tax deferred. And you cannot withdraw from then before
59 1/2 without penalty unless you choose to take a lifetime income-please consult your tax advisor before doing so. |
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