"Director New York," issued by Lincoln National Life Insurance Company, "ADAPTOR Lowest (Q)," issued by ING Insurance Company of America, and "Income Advantage" issued by Fidelity Investments Life Insurance Company are the best variable annuities on the market today, according to a review by TheStreet.com Ratings.

Lincoln National is owned by Lincoln National Corp. ( LNC) and ING Insurance Company of America is owned by ING Groep ( ING).

Each year at TheStreet.com Ratings we review the performance, features, and expenses of variable annuities to update the "20 Best Variable Annuities" and "10 Worst Variable Annuities" included in our Consumer Guide to Variable Annuities.

This year's review included more than 1,600 variable annuities encompassing more than 65,000 mutual fund subaccounts. This information is contained in a software package available to financial advisors called Principia Pro Variable Annuity, produced by Morningstar.

What makes these three variable annuities the best of the best? All of the 20 best variable annuities we chose have no front-end loads (neither do most policies), none charge you to withdraw your money early, all have a large number of mutual funds to choose from, all have below average expenses, and all have average or above-average returns.

These three funds have all of that plus the highest one-year and three-year total returns.

We want to share with you how we went about narrowing the list of 1,600 variable annuities down to the 20 best so that you can use some of the same rules to find the best variable annuities that work for you.

First, we captured the average returns for the various types of mutual funds contained in the annuity subaccounts. We will use these later to compare individual annuities against. The averages are:

Second, we captured the average total expenses for all 65,000 mutual fund subaccounts. This includes mutual fund expenses plus insurance expenses. The average through year-end 2007 is 2.11%. You can use this number to compare the expenses of any variable annuities you are considering. Just make sure that you are including both types of expenses--mutual fund plus insurance expenses.

Third, we queried the full database to narrow it down to policies with the following characteristics:

  • No front-end load. This is a fee that you are charged at the time of purchase. This type of fee used to be more prevalent than it is now. Most policies don't have it any more, which is a good thing. If you come across a policy with such a fee, disregard it completely. There are too many other variable annuities to choose from that don't have this fee.

  • No surrender charge. This is a fee that you are charged at the time you cancel the variable annuity or withdraw money from it. Unlike front-end loads, there are still hundreds of variable annuities that have a surrender fee. In the worst cases, you are charged this fee if you cancel or withdraw funds in the first nine to ten years. You should avoid a policy with this fee. Again, there are too many other annuities to choose from that don't have it.

  • At least seven mutual fund subaccounts. Although our 20 best variable annuities have subaccounts ranging from 16 to 111, there may be other good policies with fewer than that. We chose seven, because that is the minimum number of mutual funds that would still give you a decent choice and allow for diversification. Any variable annuity you choose should have at least one fund in each of the following categories: an aggressive growth fund; a growth fund or S&P 500 index fund; a growth and income fund or balanced fund; a small-cap fund; an international or global fund; a bond fund; and a money market fund.

  • Total expenses less than 2.11%. This is the average total expense for all 65,000 mutual fund subaccounts. It includes average mutual fund expenses of 0.99% plus average insurance expenses of 1.12%. Expenses come right off of the top reducing your total return so you should look for policies with expenses at or below the industry average.

  • Insurers with TheStreet.com Financial Strength Rating of B- or better. TheStreet.com Ratings evaluates companies based on several key financial measures. We recommend you focus on variable annuities that are issued by insurance companies with a Financial Strength Rating of A (excellent) or B (good). However, since the variable annuity is maintained as a "separate account," you may also decide to consider companies with a C (fair) rating, although you will want to periodically monitor them more closely. You can look up the ratings for free on the Insurers Ratings Screener.

  • Total return at or better than average. Finally, we ordered our short list of variable annuities by 1-year total return and then compared that and the 3-year total return to the industry averages shown above. The variable annuities at the top of the list made our "20 Best Variable Annuities" list.

For our full list of 20 Best Variable Annuities, you can purchase TheStreet.com Ratings Consumer Guide to Variable Annuities here.
Melissa Gannon is director of insurance and bank ratings for TheStreet.com Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.

In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Gannon cannot provide investment advice or recommendations, she appreciates your feedback; click here to send her an email.