Why variable annuities, warts and all, may be right for you

“The more you load the contract up with features, the bigger the drag on the portfolio,” said Cortazzo.

For his part, Ruiz at Oak Partners favors contracts that focus on a simple income guarantee (a living benefit) rather than market hedging or structured product annuities with loss buffers and complicated performance triggers. “Some people like them, but we look at variable annuities as a simple and specific core income solution,” he said.

In some cases, a death benefit may make sense, particularly if there is a large difference in age between spouses. But they can cost a lot, and the same protection may be available with a lower-cost term life insurance policy.

Understand the guarantee. Ruiz said that one of the biggest sources of confusion about variable annuities for consumers is the insurance guarantee. Income guarantees do not guarantee a return on your investment. Instead, they set the rate at which you can withdraw funds from the account.

The rate is applied to your initial investment or to a higher portfolio value if the market goes up. It does not guarantee a return on the underlying investments in your annuity sub-accounts. “Consumers confuse the income guarantee with a guaranteed return and they overpay because of it,” said Ruiz.

Shop around. If ever a market deserved a “buyer beware” warning, it is variable annuities. The contracts vary widely by carrier and can be famously convoluted and difficult to understand. The key things to consider, said Cortazzo at Macro Consulting Group, are whether the investment options have flexibility, do the guarantees cover the things you need to protect, who do they cover (i.e., annuitant, spouse, beneficiaries) and how much does it cost.

There are websites that allow you to compare annuity terms and prices and financial advisors will assess contracts for a fee. “We look at these contracts on a case by case basis,” said Cortazzo. “The products vary depending on whether a company is trying to grow that part of their business.”

— By Andrew Osterland, special to CNBC.com

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