Do homework before buying a variable annuity

Andrew Leckey

November 04, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Decisions, decisions.

Variable annuities sold by insurance companies offer investment return, tax deferral of your gains and death benefits in one easy package. But that doesn't make them simple. Average investors must keep in mind that variable annuities are not all alike, that some portfolios can be rather volatile and that one's investment horizon should be long-term.

Even within a single insurance firm's variable annuity offerings are a number of stock or fixed-rate choices. Doing homework is crucial.

"The bottom line is that you should not be investing in a variable annuity as a short-term investment of two to three years, because there are usually surrender charges within the first six to eight years," advised David Shapiro, an insurance consultant with NFC Consulting in Chicago. "In addition, the IRS has a 10 percent penalty tax for early withdrawal before age 59 1/2 ."

Performance of variable annuities lately has paralleled that of mutual funds, with lackluster performance among those specializing in growth stocks and gains among those in long-term bonds.

Understand the costs. "Though annuities are 'no-load' [no initial sales charge] products, your insurance agent and planner are compensated partially through the 1.25 percent annual cost that you're charged, as well as through surrender charges," pointed out Jennifer Strickland, editor of the Morningstar Variable Annuity/Life Performance Report.

Strickland's current recommendations among variable annuity contracts, based on performance of available portfolios and underlying costs, include Lutheran Brotherhood Variable Annuity, offered by Lutheran Brotherhood Variable Insurance Products Co.; Connecticut Mutual Panorama, offered by Connecticut Mutual Life Insurance Co.; and Phoenix Big Edge Plus, offered by Phoenix Mutual Life Insurance Co.

Track variable annuity performance as you do your mutual funds.

Following are top-performing variable annuity sub-accounts that invest primarily in stocks, according to Morningstar, ranked by average annual return over the past three years:

* Equi-Vest Aggressive Stock, Equitable Life Assurance Society of the United States, up 18.49 percent.

* MONYMaster Managed Portfolio, MONY Life Insurance Co. of America, up 16.77 percent.

* Phoenix Big Edge Plus Growth, Phoenix Mutual, up 13.72 percent.

* North American Franklin Valuemark II Income Securities, North American Life & Casualty Co., up 13.28 percent.

* CIGNA Investors Growth and Income, Investors Life Insurance Co., up 12.93 percent.

It should be noted that Equi-Vest Aggressive Stock portfolio is extremely aggressive. While last year's total return was a whopping 85 percent, this year it's down 18 percent.

Strategies do vary.

"Recently, I purchased the convertible securities of Delta Air Lines because it was forced to come to market at a time when stocks were down," said Matthew Avery, senior portfolio manager of North American Franklin Valuemark II Income Securities. "I buy convertibles because they provide good yields with the upside price appreciation potential of the common stock."

Volatile high-yield bonds, while not for everyone, have played a big role among the top fixed-income variable annuities. Oppenheimer High Income portfolio was used by the two top-performing sub-accounts in total return the past three years.

These were Life of Virginia Commonwealth/Oppenheimer High Income, Life Insurance Co. of Virginia, averaging a 15.90 percent total return; and Bankers Security USA Plan/Oppenheimer High Income, Bankers Security Life Insurance Society, up 15.77 percent.

Rounding out the top five fixed-income performers, Fidelity High Income portfolio was used by sub-accounts that ranked third through fifth.

These were Fidelity Retirement Reserves/Fidelity High Income, Fidelity Investment Life Insurance Co., with a 14.35 percent annual total return; Life of Virginia Commonwealth/Fidelity High Income, Life Insurance Co. of Virginia, up 14.18 percent; and Ameritas Overture II/Fidelity High Income, Ameritas Variable Life Insurance Co., up 14.06 percent.

"Two larger holdings that contributed to our performance this year have been Unisys Corp. and Chrysler Corp., with their straight bonds and convertibles appreciating significantly," said Barry Coffman, portfolio manager of Fidelity High Income.

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