With Variable Annuities, the Details Vary Too

Now that tax rates are likely to rise under President Clinton, variable annuities are looking even more attractive to well-heeled investors.

Some annuity companies say they are already seeing a surge in interest in the products, which wrap an insurance policy around mutual funds.

But you need to be wary. Not all variable annuities are alike. If you aren’t careful, you could find yourself paying high fees for lackluster performance.

How do you choose a variable annuity? First, recognize that you are buying two things: an insurance product and a mutual fund. Look at the specifics of both to determine which product is right for you, says Jennifer Strickland, editor of Morningstar’s Variable Annuity Life Performance Report.

Among the details to consider:

Insurance fees and services. Most variable annuity companies charge a fee to provide the insurance portion of the contract and another fee to manage the mutual funds you’ve chosen. The insurance fees vary widely, from about 0.5% of your account value to more than 1.5%.

Generally, the insurance portion of the contract will protect your heirs from your bad investment decisions. If you die at a time when your account has decreased in value, the insurer will pay your heirs the greater of what you put in or your accumulated earnings and contributions, for example. Some insurers will guarantee your heirs the value of your contributions plus interest if you die before pulling your funds.

The average insurance fee is 1.25%, Strickland says. But Vanguard offers funds that charge only 0.55%, while Equitable generally charges 1.49%. Sometimes the lower fee means you’re getting fewer bells and whistles on the insurance coverage. Check. Some companies simply give you more for less.

Number and types of “sub-accounts� or investment options. Most annuity companies will allow you to choose between several different “sub-accounts�--the mutual fund portion of the variable annuity. Typically, the sub-accounts include different mutual funds that invest in everything from stocks and bonds to Treasury bills and municipal securities.

Some insurers offer only a few options, while others offer more than a dozen. If your investment needs are fairly simple, you’d probably be satisfied with just a few good choices. But if you like to experiment and take some risks with a portion of your account, you’d probably be happier with a large variety of sub-accounts.

Surrender fees. If you cash out of your variable annuity within the first five to 10 years, the insurer usually charges a surrender fee equal to 5% to 10% of your account value. If there’s any chance you’ll need to cash out early, seek a fund with low or no surrender fees. Vanguard, Mutual of America, Equitable Survivorship and Charter/Scudder Horizon offer no-charge surrenders. John Hancock has annuities with 1% surrender fees.

Historic performance. Although good past performance can’t assure future performance, it helps to know how different annuities and annuity sub-accounts have fared over time. Morningstar’s Variable Annuity Life Performance Report ranks variable annuities based on investment objectives and performance over several periods. A report can be found in some public libraries or can be ordered from Morningstar for $55. Chicago-based Morningstar can be reached at (312) 427-1985.

Contract fees. These are similar to the annual fees you might pay on your savings or brokerage account. They also vary between annuity companies and individual investment options. Some companies charge nothing. Others levy relatively substantial amounts. For example, there are no annual contract fees on the Charter/Scudder annuities, but if you buy an Equitable product you’ll pay between $30 and $72 annually. Meanwhile, Metropolitan Life charges $108 annually for several of its accounts, and Pacific Mutual levies a $90 annual fee on some funds.

Bells and whistles. Annuity companies offer various services and product features. If you’re debating between two or three companies that otherwise seem similar, you might look at the convenience and service factor to make the decision.

Do they offer free unlimited transfers between sub-accounts? Toll-free access? Automatic contributions? What about withdrawal options? Can you borrow a portion of your account value without penalty? Think about what sort of services would be important to you and shop for them.