subject: History of Annuities [print this page] A Checkered Past A Checkered Past
The year was 1653, and Frenchman Lorenzo Tonti created a great strategy for raising money. Called tontine, investors received investment income in return for purchasing shares with their capital investment. Gradually, shareholders began to die leaving all of their remaining income spread between the remaining shareholders. The last person living received all of the remaining benefits. Tontines became popular in the United States and Britain. Governments used them to back public works projects. The temptation to murder fellow investors to obtain their money eventually spurred governments to ban tontines.
Though flawed, tontines became the model for the deferred and immediate annuity. Fortunately, today's investors need have no fear of being bumped off by their neighbors since annuities do not mingle investor funds.
Some Important Annuity Basics to Think About
Before purchasing an annuity, remember to check the financial stability of the insurance company that will hold your investment. Tax deferment is a great advantage of annuities; however, early withdrawal not only causes a tax penalty of 10% if funds are withdrawn before age 59 , but also results in surrender charges. Surrender charges are usually only applicable if surrender occurs in the first several years of your annuity. Variable annuities charge many fees and are designed for long-term investment. Sub accounts may fluctuate according to market pressures causing the value at surrender to be higher or lower than the original investment. Reading the variable annuity prospectus is a very important part of making the decision of whether or not to purchase this volatile annuity.
Three Types of Annuities
Tax Deferral
Contributions made to Annuities during the accumulation phase are tax deferred. Taxes are not due on your growing investment until you withdraw funds. Once you begin receiving payments, taxes are based on your normal income tax rate.
Unlimited Contributions
Other types of investments have limits imposed by the federal government specifying how much you can contribute during the year. Annuity investment amounts are limited only by the constraints of the issuing insurance company.
Flexible Withdrawal
There are many options open to you once you decide to withdraw money from your annuity. One of the most popular payment options is having an income paid to you for life. Other alternatives are available as well. You can withdraw your money in one lump sum or leave it to accumulate interest for a later emergency or an inheritance for your heirs. Your company may require you to withdraw a set minimum amount each year.
The annuity has come a long way since 1653. Fortunately, you no longer have to take your life in your hands to participate.
