Variable Annuity History Revealed
Before we talk about the variable annuity history we should understand what a variable annuity is. A variable annuity is a contract between an investor known as the annuitant and an insurance company whereby the annuitant agrees to pay in periodic payments over a number of years or to pay a lump sum to the insurance company in return for a promise of regular monthly payments starting a some point in the future and continuing for the rest of the annuitants life.
The contract in essence transfers the risk that the annuitant will live too long and outlive their retirement income to the insurance company. The insurance company promises to pay a certain amount until the annuitant dies. After death the contract either ends with the remainder of the money if there is any being forfeited to the insurance company. There are other options for income to continue to a joint annuitant or a death benefit being paid. This will be discussed later.
The money in the variable annuity is invested in a variety of different mutual funds which are in turn invested in the stock market. This gives the potential for upside appreciation over a period of years until retirement.
Variable Annuity History
In the United States the variable annuity started being used by TIAA-CREF (Teachers Insurance and Annuity Association-College Retirement Equity Fund) in the 1950’s as a method of investing for retirement. It seems that the people in this retirement fund were concerned about the rising inflation in the country and the fact that their fixed annuities put them at a disadvantage in the later years of their retirement because their incomes did not increase.
By allowing them to invest in the stock market they felt that they stood a better chance of increasing their income after retirement. This also allowed them to have the potential to retire with a larger sum of money in their annuities. The problem with the annuity market in these early years was that they were regulated by the states and therefore it was complex to deal with all the varieties.
The Benefits of Increased Regulation of Variable Annuities
In the 1970’s and the 1980’s the government began increasing the regulation of variable annuities and they became more uniform throughout the states. This laid a lot of fears to rest with purchasing these newer contracts. The public became more aware of variable annuities and this increased their popularity.
It is reported that the premiums in annuities increased from $60 billion to $71 billion between 1989 and 1993. This is primarily due to the growing awareness of the variable annuity and the comfort level investors had with it
More Recent Developments in Variable Annuity History
In the 1980’s and 1990’s there were some real scares that hit the stock market but for the most part, people felt that they could trust the leaders who ran the large corporations of the U.S. and of foreign corporations as well. Inflation was one of the biggest fears that investors had. Then in the 2000’s we had the technology bubble bursting and many large corporations crumbling because of greed and misdeeds of their leaders. This caused a lot of people to lose faith in the stock market.
The insurance companies started designing variable annuities with new safety net features to keep them an attractive option for investors. Some of these features included guaranteed minimum income riders and other riders that were used to insure the value of the annuities would not plummet to extremely low levels. Some guaranteed as high as a 6% compounded rate of increase on the income basis of the contract until age 85. This means that even if the markets go down only the amount of money that you retire with is whatever you started with compounded at 6% until you start taking withdrawals
The new features made investors feel like they could rest easy even being in variable annuities. They knew that they would get their income streams and some even guaranteed a return of all money invested. These added features came with a cost but most people felt that they were worth the price.
When the 2007-2008 financial market crisis and housing market plummet hit, the people who had added these special riders to their annuities were extremely relieved. However, the insurance companies that were obligated to honor these benefits started to get a bit squeamish. They realized that if the financial downturn continued for a period of time these options could get them in financial trouble. Most of the current guarantees a good but may not be as liberal as the ones in force before 2008.
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Who Should Consider a Variable Annuity?
The variable annuity history shows us that over a period of time the stock market usually out performs a fixed rate investment. That does not mean that this will happen for sure in the future, however if you have at least 8 to 10 years until you need to start taking withdrawals from your annuity, you should consider a variable annuity. Keep in mind that there are still riders that will protect you from extreme downturns in the market. Be sure to investigate the specifics on the contract you are considering. These options tend to change with the changing markets.
Companies that Sell Variable Annuities
Most companies that sell annuities will have variable annuities available. What you need to consider when buying a variable annuity is what riders are available on each contract. This could be very important later on down the road. Ohio National Insurance Company has a good variable annuity contract with living benefits (guaranteed income riders) available. MetLife is another company with good income riders on variable contracts. As mentioned earlier these features will change so check the specific details of the riders at the time you are ready to purchase an annuity. Although the insurance companies went a bit overboard with benefits in the mid 2000’s and had to pull back a bit, there are still many great riders and benefits that will make you feel more secure in the current markets.
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