Variable annuity is popular, but comes with risks

Andrew Leckey

April 16, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Amid the explosion in sales of variable annuities, make sure this impressive insurance product doesn't damage your pocketbook.

A furtive search for tax-deferral strategies under the Clinton administration, a desire for higher returns and the aging of the Baby Boom generation are responsible for the burst in activity.

More than $20 billion in investor money was put in variable annuities in 1992, a 59 percent increase over the prior year, according to the Life Insurance Marketing and Research Association. Some firms offering these retirement vehicles say sales were up nearly 100 percent in the first quarter of '93.

"The number of name-brand mutual funds entering the variable annuity market and the movement of money from low-yield certificates of deposit and money-market funds have played a role," explained David Shapiro, principle with Chicago-based NFC Consulting.

"My real concern, however, is whether the consumer understands the risks when he puts money into variable annuities."

Investment return, tax deferral of gains and death benefits are all part of the variable annuity package. But the mutual funds they feature differ in performance, volatility and strategy. Their success or failure determines your retirement pot.

A variable annuity is for the long haul. You face a 10 percent IRS penalty if you withdraw when you're younger than 59 1/2 years of age, and you also pay tax on capital gains. Furthermore, the company discourages early withdrawal.

"Realize there is illiquidity, with a surrender charge on the annuity if you withdraw early [usually within the first six to eight years], so definitely think of this as a long-term investment," said Jennifer Strickland, editor of the Morningstar Variable Annuity/Life Performance Report.

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 you're charged, as well as through surrender charges, she noted.

With performance and cost in mind, Strickland recommends Lutheran Brotherhood Variable Annuity, Lutheran Brotherhood Variable Insurance Products Co., Minneapolis; Connecticut Mutual Panorama Plus, Connecticut Mutual Life Insurance Co., Hartford, Conn.; and Phoenix Big Edge Plus, Phoenix Home Life Mutual Insurance Co., Enfield, Conn.

Top equity subaccounts in average annual return over the last three years, according to Morningstar:

* Manulife Account 2 Annuity Real Estate Securities, Manufacturers Life Insurance Co. of America, Toronto, Canada, up 23.21 percent.

* Equitable Equi-Vest Aggressive Stock Portfolio, Equitable Life Assurance Society of the United States, New York, up 21.46 percent.

* Anchor National ICAP II Capital Appreciation, Anchor National Life Insurance Co., Los Angeles, up 20.95 percent.

* MONYMaster Small Cap Portfolio, MONY Life Insurance Co. of America, New York, up 20.82 percent.

"We invest in controversial companies undergoing change, so the market is often uneasy about them," said John Callaghan, portfolio manager of Equitable Equi-Vest Aggressive Stock Portfolio, down 4 percent last year after an 85 percent gain in 1991.

Pointing out that aggressive stance, 17 percent of the portfolio is in cellular telephone companies such as U.S. Cellular and McCaw Cellular. Computer technology comprises another 18 percent, with stocks such as Newbridge Networks and Adobe Systems.

Meanwhile, top variable annuity fixed-income subaccounts over the same three-year period featured volatile high-yield "junk bond" portfolios.

Leaders were Fidelity Retirement Reserves/Fidelity High Income, Fidelity Investments Life Insurance Co., Boston, up 20.97 percent; Life of Virginia Commonwealth/Fidelity High Income, Life Insurance Co. of Virginia, Richmond, Va., up 20.79 percent; and Life of Virginia Commonwealth/Oppenheimer High Income, Life Insurance Co. of Virginia, Richmond, Va., up 20.77 percent.

"Our portfolio tends to have 65 issues, with turnover of 75 percent to 100 percent annually," said David Negri, portfolio manager of Life of Virginia Commonwealth/Oppenheimer High Income Fund. "Holdings include 8-year General Nutrition bonds and 10-year Life Partners bonds."

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