Investing in variable
annuities requires
comparison shopping

Answer: Variable annuities are long-term investments designed to provide tax-deferred savings and an income stream for retirement.

However, you might have been dissuaded from investing in this vehicle because of two key factors: high annual fees and lack of liquidity. But if you're willing to do some comparison shopping, you can find a lower-fee, more liquid version of the variable annuity -- and when you do, your efforts may be rewarded.

Before we explore fees and liquidity, however, let's see what benefits a variable annuity can offer:

» Tax-deferred earnings: When you purchase a variable annuity, you place your money in various sub-accounts that can be made up of stocks, bonds and other securities. You choose how to allocate your investment dollars, based on your risk tolerance and time horizon, and your earnings grow tax-deferred until you begin taking withdrawals. (Keep in mind, though, that this investment is called "variable" for a reason; your account balance will fluctuate along with the financial markets.)

» Lifetime income stream: You can structure your variable annuity so that it will provide you with an income stream that you can't outlive.

» High contribution limits: You can invest far more money in a variable annuity than you can to an IRA or your 401(k).

» Guaranteed death benefit: Your beneficiary is assured of a minimum guaranteed death benefit, based on the claims-paying ability of the insurance company that issued the annuity.

A variable annuity offers some attractive features. But some annuities will charge you high fees for these benefits. When you add up the "insurance charges," asset-management fees and, in some cases, surrender fees (called "contingent deferred sales charges"), you might find that some variable annuities are just too expensive relative to their return. Plus, the surrender fees can take away liquidity by making it expensive for you to get money out of your annuity contract.

That's why you need to look for variable annuities with low fees and low, or no, surrender charges. In recent years, some lower-cost options have emerged. Some variable annuities now assess a front-end sales charge, or "load," on consumers in exchange for lower annual fees. You may see this option referred to as an "A-share" annuity. The more you invest, the lower the up-front sales charge may be. To ensure you are charged the lowest sales charge you are eligible for, be sure to ask your investment professional whether any of your current investments qualify. You'll typically get the greatest benefit from an A-share annuity if you hold it for at least seven years; at that point, your fee savings usually compensate you for the higher initial sales charge.

And the seven-year wait is not really a hardship, because variable annuities are unquestionably long-term investment vehicles. You should hold onto a variable annuity long enough to give the investments a chance to grow, and to overcome any "down" periods that may occur as a result of market slumps.

» Variable annuities, even ones with lower fees, are not for everyone. Variable annuities fluctuate in value, which means you may get back less than your original value. And withdrawals before the age of 59 1/2 may be subject to a 10 percent IRS penalty and income taxes.