Annuities have come a long way since the days when they were a simple exchange of cash for income. In their 2000 year history they have been used primarily as a way for governments or institutions to raise capital which was repaid to an individual in the form of a lifetime stream of income. Not until the 20th century did their use expand to serve the savings needs of individuals who had lost confidence in the banks during the Great Depression. Today, annuities are used in many ways to address the needs of individuals and businesses.

Income Needs

Secure Retirement Income

The original purpose of annuities was that of an income generator. But, for a Roman citizen who wasn’t expected to live much beyond the age of 28, the need for a secure, lifetime income source was not nearly as great as the need today with life expectancies stretching out beyond the age of 87. Annuities are still the only vehicle that can assure retirees that they won’t outlive their income source.

Annuity payouts are based on the amount of the initial investment amount, the number of payment periods, and an assumed rate of interest. For a lifetime income, the number of annuity payments is based on a person’s life expectancy. Annuities are an insured contract, which means that, if a person lives beyond his or her life expectancy the life insurance company is obligated to continue the income payments for life.

Installment Payments

Annuities are often used by individuals and businesses to structure a payment schedule for a specific number of payments, based on a specific payment amount. Businesses might use annuities to establish a payment plan for compensating an employee or a business partner in a buyout situation. These are legal arrangements that usually require structure and guarantees that can only be provided by instruments such as annuities.

Annuities are the primary vehicle used when a financial settlement is made between parties involving a series of payments as opposed to a lump sum payment, also referred to as a structured settlement. Lottery winnings also use a structured settlement annuity when they are paid in equal installments over ten or twenty years.

Accumulation Needs

Supplemental Retirement Savings

During the Great Depression, life insurers added a savings component to annuities to enable people to safely put money aside for retirement when the banks were closing up shop. Back then, annuities were considered to be safer than bank savings because the savings deposits were kept on reserve by the life insurer as opposed to being loaned out to borrowers as the banks would do.

Today, annuities are still considered to be among the safest savings vehicles because of the strict reserves requirements to which life insurer must adhere as well as the state guaranty funds that protect policyholder accounts up to $250,000 in some states.

Tax Sheltered Investment Alternative

After World War II, when incomes started to climb and the top tax bracket topped out at 90%, an annuity investment was introduced that allowed investors to earn stock market returns without having to pay taxes on their earnings. Essentially, life insurers adapted the savings component of annuities to incorporate separate investment accounts, similar to mutual funds in which investors could choose among professionally managed stock and bond portfolios.

Because annuities are afforded the same tax treatment as qualified plans, as far as the tax deferral of accumulated earnings, they became attractive alternatives for investors who could benefit from tax savings on their investments. During the 1980’s, when interest rates climbed into double digits, fixed yield annuities became a popular alternative to taxable bank CDs and other fixed yield investments.

Sleep Insurance

For hundreds of years, people have turned towards annuities for assurance in times of uncertainty. The safety and guarantees built into the contracts that are backed by life insurance companies provide people with peace-of-mind that is sorely needed after the shocks of market crashes or economic meltdowns. Even the more risk tolerant investors need to inject some stability and predictability into their retirement portfolios and annuities are a way to do that.

Asset Protection

Under state and federal statutes assets such as pension plans, life insurance and annuities are protected from civil liabilities, liens and debt claims. It is an accepted practice for individuals to arrange their assets in a way that will shield them from claims so long as it is not done with intent to defraud. In some states, assets held in annuities are fully protected against liability claims, but in others, their exemption in limited to a specific dollar amount. In a few states, annuities are not exempt and, therefore, they are vulnerable to claims.


Very few investment vehicles are as multi-faceted as annuities. Their unique features and characteristics combine to create a number of possibilities for their use in a variety of financial situations, which is why they remain one of the more popular financial planning tools today. Their immense popularity is only exceeded by their complexity, so, there use should be considered along with the guidance of a knowledgeable financial professional who specializes in annuities.