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A life annuity is an annuity, or series of payments at fixed intervals, paid while the purchaser (or annuitant) is alive. The majority of life annuities are insurance products sold or issued by life insurance companies. However, substantial case law indicates that annuity products are not necessarily insurance products.
Annuities can be purchased to provide an income during retirement, or originate from a structured settlement of a personal injury lawsuit. Life annuities may be sold in exchange for the immediate payment of a lump sum (single-payment annuity) or a series of regular payments (flexible payment annuity), prior to the onset of the annuity.
The payment stream from the issuer to the annuitant has an unknown duration based principally upon the date of death of the annuitant. At this point the contract will terminate and the remainder of the fund accumulated is forfeited unless there are other annuitants or beneficiaries in the contract. Thus a life annuity is a form of longevity insurance, where the uncertainty of an individual's lifespan is transferred from the individual to the insurer, which reduces its own uncertainty by pooling many clients.
Ulpian is credited with generating an actuarial life annuity table between AD 211 and 222. Medieval German and Dutch cities and monasteries raised money by the sale of life annuities, and it was recognized that pricing them was difficult.J. Franklin, The Science of Conjecture: Evidence and Probability Before Pascal (Baltimore: Johns Hopkins University Press, 2001), 269-272. The early practice for selling this instrument did not consider the age of the nominee, thereby raising interesting concerns." From Commercial Arithmetic to Life Annuities: The Early History of Financial Economics, 1478-1776 " Geoffrey Poitras, Simon Fraser University These concerns got the attention of several prominent mathematicians Seminar Series on Quantitative Finance The Fields Institute over the years, such as Huygens, Bernoulli, de Moivre and others: even Gauss and Laplace had an interest in matters pertaining to this instrument.Stephen Hawking , Running Press, 2005
It seems that Johan de Witt was the first writer to compute the value of a life annuity as the sum of expected discounted future payments, while Edmond Halley used the first mortality table drawn from experience for that calculation. Meanwhile, the Paris Hôtel-Dieu offered some fairly priced annuities that roughly fit the Deparcieux table discounted at 5%.Pierre-Charles Pradier, « Les bénéfices terrestres de la charité. Les rentes viagères des Hôpitaux parisiens 1660-1690 » Histoire & mesure (décembre 2011, à paraître).
Continuing practice is an everyday occurrence with well-known theory founded on robust mathematics, as witnessed by the hundreds of millions worldwide who receive regular remuneration via pension or the like. The modern approach to resolving the difficult problems related to a larger scope for this instrument applies many advanced mathematical approaches, such as stochastic methods, game theory, and other tools of financial mathematics.
The phases of an annuity can be combined in the fusion of a retirement savings and retirement payment plan: the annuitant makes regular contributions to the annuity until a certain date and then receives regular payments from it until death. Sometimes there is a life insurance component added so that if the annuitant dies before annuity payments begin, a beneficiary gets either a lump sum or annuity payments.
Variable annuities are used for many different objectives. One common objective is deferral of the recognition of gains. Money deposited in a variable annuity grows on a tax-deferred basis, so that taxes on investment gains are not due until a withdrawal is made. Variable annuities offer a variety of funds ("subaccounts") from various money managers. This gives investors the ability to move between subaccounts without incurring additional fees or sales charges.
Variable annuities have been criticized for their high commissions, contingent deferred sale charges, tax deferred growth, high taxes on profits, and high annual costs. Sales abuses became so prevalent that in November 2007, the Securities and Exchange Commission approved FINRA Rule 2821" "FINRA Publishes Guidance, Text for New Rule Governing Deferred Variable Annuity Transactions" Financial Industry Regulatory Authority, Inc, November 6, 2007 requiring brokers to determine specific suitability criteria when recommending the purchase or exchange (but not the surrender) of deferred variable annuities.
In the UK there are a large market of annuities of different types. The most common are those where the source of the funds required to buy the annuity is from a pension scheme. Examples of these types of annuity, often referred to as a Compulsory Purchase Annuity, are conventional annuities, with profit annuities and unit linked, or "third way" annuities. Annuities purchased from savings (i.e. not from a pension scheme) are referred to as Purchase Life Annuities and Immediate Vesting Annuities. In October 2009, the International Longevity Centre-UK published a report on Purchased Life Annuities (Time to Annuitise). In the UK it has become common for life companies to base their annuity rates on an individual's location. Legal & General were the first company to do this in 2007.
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