Decisions, decisions.
Variable annuities sold by insurance companies offer investment return, tax deferral of 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.
Within an insurance firm`s variable-annuity offerings are a number of stock and fixed-rate choices. 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 that specialize 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,” said Jennifer Strickland, editor of the Morningstar Variable Annuity/Life Performance Report.
Strickland`s 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 track mutual-fund performance.
The following are the top-performing variable-annuity subaccounts that invest primarily in stocks, according to Morningstar, ranked by average annual return over the last 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 the Equi-Vest Aggressive Stock portfolio is extremely aggressive. While last year`s total return was a whopping 85 percent, this year the portfolio is down 18 percent.
Strategies 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 subaccounts in total return the last three years.
They 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 subaccounts that ranked third through fifth.
They were Fidelity Retirement Reserves/Fidelity High Income, Fidelity Investment Life Insurance Co., with a 14.35 percent average 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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Andrew Leckey`s column appears Sunday, Monday and Thursday.
