If you wanted to buy a variable annuity a few years ago, it often meant spending the evening with a monotone insurance agent who rattled on about fixed-amount payout options, death benefits and asset-based distribution expenses. After a couple of hours of talk like that, you can understand why few people had the stamina to comparison shop.
But that was before the Internet made comparison shopping a cinch -- even for complicated, pain-in-the-derriere products such as variable annuities. Four sites --
Variable Annuities Online -- let you sift through hundreds of different VA brands and the baffling array of options that come with each one.
At the same time, there's a move on by 20 industry heavyweights, including
, to make annuities more comprehensible to the general public. For starters, the group wants VAs to be called "personal retirement accounts." The hope, of course, is to demonstrate that VAs are suddenly relevant to the millions of Baby Boomers who now must get serious about retirement.
And maybe they have a point. In its most basic form, a VA is a bundle of financial products and tax benefits issued by an insurance company. VAs are designed to be held until you reach at least age 59 1/2 (or pay a 10% early withdrawal penalty). They make sense only if you've already fully funded your 401(k), IRA or any other tax-deferred retirement plan you might have. But then, assuming you have some cash left over, you're free to stash as much of it as you want into a VA each year. As with a Roth IRA, you pay taxes on that money beforehand. But once your money is encased within the VA, it grows tax-deferred. You get to divvy it up among a list of mutual funds (which, in
, are called subaccounts).
You pay regular income taxes on money that's withdrawn from a VA. And usually there are a number of options for withdrawing it. For example, some policies are designed to pay for long-term care insurance. Another popular option is income for life. And you can also elect to receive lump-sum distributions and/or a life-insurance payout following your demise.
contributing editor Vern Hayden explored some reasons for buying VAs in
part 1 and
part 2 of a recent series.
Despite their apparent advantages, many people view variable annuities as an investment only slightly more desirable than Florida swampland. That's largely because of the high fees VAs charge, which can total 5% or more annually, depending on the options you choose. But, as
noted in a recent
story, low-cost leaders like
T. Rowe Price
, are launching products that cut these fees to the bone.
Compare and Save
But what I want to focus on here is how the Web has greatly simplified the task of choosing a variable annuity provider and designing the actual annuity itself. Thanks to the insure.com's
screening tool, you may never be forced to give up a night's TV in order to meet with your insurance representative.
The insure.com app -- which uses
data -- lets you search out top-performing subaccounts the same way you'd screen for stocks or funds at sites like
MoneyCentral Investor. You can search by investment objective and performance over a variety of time periods.
You then can click on the subaccount's issuer to bring up more details on the variable annuity itself, including loads, management fees and the like. But more importantly, you can look at the other subaccounts available through that particular variable annuity and their one-, three- and five-year performances. Like mutual funds, each subaccount has a plainly stated objective, such as growth and income or large-cap value. The idea is to mix and match from the available list to create a portfolio that meets your objectives.
The best one-year return for a subaccount I found with the insure.com tool was Fidelity Retirement Reserve's PBHG Technology and Communications -- up 227% last year. Clicking for more information, I found a list of 27 other subaccounts that could be used to balance a portfolio with such an aggressive technology-sector fund, including an
index fund, bond and money market funds and a variety of growth and growth-and-income funds.
To comparison-shop using insure.com's VA performance tool, you might simply repeat this process. First pull up a list of top performing subaccounts and then compare the details of the variable annuities that hold them.
AnnuityScout.com culls through a list of 40 VA providers it has partnered with, to find the top four, based on a variety of benefits, such as number of subaccounts, management fees and allowable annual transfers between subaccounts. The winners emerge as a side-by-side chart. Annuitynet.com does essentially the same thing, but its partner list is much shorter. Both AnnuityScout.com and Annuitynet.com are in the business of selling you the products they represent online.
Variable Annuities Online goes a step further. You can pull up a list of top-performing subaccounts by category. For example, suppose you wanted to focus your variable annuity on small-cap growth stocks or emerging-market stocks. You just click on that category to view the top performers.
If you already own an annuity, you can use the Variable Annuities Online site to create an online portfolio consisting of the subaccounts you've selected. That way you'll know what your contract's worth before the quarterly statement arrives. Another feature that's tougher to use lets you analyze the cost of an annuity. It's designed both for prospective buyers and for those who bought high-fee annuities in the past and want to make a tax-free exchange to a cheaper alternative.
Variable Annuities Online's portfolio tool is free. The site's other features cost $99 per year. But there's a two-week trial sub that should give you enough time to try everything out.
All this is pretty simple stuff compared with the online tools that let you research, design and build a conventional portfolio of stocks or funds. In a previous
column I talked about portfolio planning tools such as
finportfolio.com that let you analyze your objectives, choose an asset allocation strategy, then select mutual funds that help meet those objectives. Nothing like that exists for VAs as yet. So, my advice would be to go to
SmartMoney.com and use that site's asset allocator. (To find it, click on tools.) Answer a few questions, and the java app adjusts a pie chart showing you what percentage of your portfolio should be allocated to four basic asset classes. As a next step, go back to the screening tools at insure.com or Variable Annuities Online and build an annuity based on that asset allocation.
And if all that seems like hard work, think of the alternative: an evening discussing death and taxes with that monotone insurance agent.
Mark Ingebretsen is editor-at-large with
Online Investor magazine. In the past, he has served as a marketing consultant for AEGON Group's variable annuity products. Besides mutual funds, his portfolio currently includes a variable annuity from TIAA-CREF. While Ingebretsen cannot provide investment advice or recommendations, he welcomes your feedback at