Do homework on annuities

Andrew Leckey

November 05, 1991|By Andrew Leckey | Andrew Leckey,Tribune Media

Annuities, those instruments which permit your money to grow free of tax until you withdraw it, are being promoted with a hard-pitch selling campaign. They're pushed through mass mailings and phone calls by a vast array of companies that now includes not only insurance firms but brokers, mutual fund firms and bankers. It's working: Last year annuities took in $54 billion in new money.

But, as with any investment, you must do your homework. Find out all fees, understand returns and be wary of insurance firms with financial woes.

The two basic types of annuities are: 1) the fixed annuity, in which interest yield is readjusted periodically, and 2) the variable annuity, in which money is invested in stock and bond mutual funds with yield dependent on performance.

Many experts recommend you hold your annuity at least 10 years to justify costs involved. There are annual administrative fees, mortality charges (so that heirs get the account amount or original investment amount, whichever is greater), and money management charges. There are penalties for getting out early. If you withdraw funds before age 59 1/2 , you owe income tax, plus a 10 percent penalty.

To make sure you won't lose part of your fixed annuity balance if the insurer backing it fails, look for top ratings from A.M. Best, Moody's and Standard & Poor's. Variable annuity assets are separate accounts and wouldn't be subject to the creditors of the insurance company.

"Annuities are more popular because there are a limited number of tax-deferred vehicles," observed Lori Lucas, contributing editor to Chicago-based Morningstar Inc., which tracks variable annuity performance. "These annuity funds mirror the trends you see in general mutual funds, so they currently emphasize small-company growth stocks."

Not everyone favors variable annuities.

"I personally prefer fixed annuities because principal is guaranteed and I feel that, unless the investor really wants the annuity feature, he'd be better off in a regular mutual fund," said Stephen Reed, president of Reed Financial Group, Temecula, Calif.

Portfolio managers don't really have much to do with the annuity aspect of the instrument. They just invest.

"We are an aggressive growth fund, buying stocks on weakness when people don't want them, and then selling when everybody gets on board," explained Barry Feirstein, portfolio manager of Equitable Equi-Vest Aggressive Stock, up 59.53 percent this year to lead the pack. "We've done best this year with stock in U.S. HealthCare, Amgen and Countrywide Credit."

Examine all portfolios. For example, it's not unusual to find junk bonds in aggressive variable annuities.

"Our high-yield portfolio mix is 84 percent bonds, including more than 100 junk bond issues, and also 11 percent cash and a 5 percent mix of common stock," said Peter Camin, vice president with Kemper Investors Life Insurance Co., whose Kemper Advantage III High Yield ranks fourth in performance.

Top-performing variable annuity portfolios in 1991, according to Morningstar:

Equitable Equi-Vest Aggressive Stock, New York, $700 million in assets, $1,000 minimum initial premium, up 59.53 percent.

CIGNA Investors Variable Annuity Aggressive Equity, Philadelphia, $1.79 billion in assets, $1,000 minimum initial premium, up 49.95 percent.

Manulife Account 2 Annuity Emerging Growth Equity, Toronto, $7.7 million in assets, $1,000 minimum initial premium, up 47.18 percent.

Kemper Advantage III High Yield, Chicago, $120 million in assets, $1,000 minimum initial premium, up 46.77 percent.

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