For all the protection that insurance companies offer us, from disasters financial and physical, they don't always serve us well. We often buy insurance we don't need, or succumb to pitches for dubious options such as variable annuities. Now it seems that insurance companies fall woefully short in another crual area: the mutual funds they offer.

The dangers of poor fund performance 
It seems that mutual funds offered by insurance companies generally tend to underperform other organizations' funds, by about 1.5% per year. According to a Smart Money calculation, "On a $10,000 investment, that could be a difference of $19,000 over 20 years." (Note that the difference is nearly twice the original investment amount; small percentage sums can have huge effects over time.)

The findings come from a study by three finance professors, who offer a host of explanations. For starters, study co-author Tong Yu, an associate professor at the University of Rhode Island, said, "Even when performance is bad, clients do not move their money." If you have a lackluster fund performer in your brokerage account, or held directly with a fund company, it's relatively simple to sell that holding and move the money elsewhere. If the lackluster fund is one of several you could choose from in an insurance product such as an annuity, you'll have fewer alternative investments available, and you'll be more likely to leave it alone.

This makes sense, and it also reminds me of the competitive advantage known as "switching costs." For example, if you sign up for cell-phone service with Verizon (NYSE: VZ), a host of built-in factors will make you much less likely to change providers anytime soon. The contract you signed may be full of possible penalties, and the special rates or free calls to friends and family on the same network might sway you to stick around. Switching providers isn't simple, carrying a cost in energy, convenience, and money. Cable television companies such as Comcast (Nasdaq: CMCSA) enjoy similar switching costs, as does Time Warner's (NYSE: TWX) AOL service and other email providers. No one is eager to inform hundreds of contacts about a new email address, or learn a new system.

Why these funds fall flat
What else helps insurance company funds do poorly? Here are a few factors:

  • Insurance companies are naturally conservative, respecting the spirit and the letter of various regulations that can impede them from investing more aggressively.
  • Providing insurance and calculating risks, rather than maximizing investment returns, is these companies' primary goal. (In fairness, not all offerings from mutual fund companies excel at making money, either. The Van Wagoner Emerging Growth (VWEGX) fund -- not an insurance-company-offering -- has averaged annual losses of 11% over the past decade as of March 31. It recently included Ciena (Nasdaq: CIEN), Emcore (Nasdaq: EMKR), and (Nasdaq: PCLN) among its top holdings.)
  • Investors in insurance companies' poorly performing funds also tend to pay little attention to them, giving the fund managers little incentive to actively try to keep their business.

Fight back against fund flops
The main takeaway here is to pay attention to all your funds' performances -- including those in insurance products -- and to evaluate insurance funds' performance closely before signing up for them. The authors of the study also suggest that these tips don't just apply to insurance-company funds. When investors in any sort of mutual fund don't monitor their results, they're asking for trouble.

Choose your funds carefully, and be prepared to move your money if you lose faith in the fund and its management. (One or two sluggish years are not necessarily enough reason to sell. Some funds do better in certain environments than others, and some managers may have made long-term investments that simply have yet to pay off.)

A broad-market index fund will give you roughly the performance of the overall market -- roughly 10% a year, on average, over the long haul. There's no shame in following the simplest form of fund investment. Still, if you'd like to find promising funds with long-term market-beating returns, consult our Motley Fool Champion Funds newsletter. A free trial includes full access to all past issues.

Longtime Fool contributor Selena Maranjian owns shares of Time Warner. and Time Warner are Motley Fool Stock Advisor recommendations. The Motley Fool is Fools writing for Fools.