After two years of regaining their confidence after the market meltdown, investors are back into the stock market in a major way. Nowhere is that more evident than in the recent popularity of variable annuities, which some believe are an essential part of a good retirement portfolio. Even though insurance companies have sold more variable annuities lately, many investors aren't all that familiar with them. Below, we'll take a look to see whether variable annuities give you a valuable edge over other types of investments.

Is it safe to go back into the water?
As part of their New Year's resolutions, investors seem to have gotten over whatever fear they may have had about stocks. Money flows have started coming back into domestic stock mutual funds, reversing a long trend of outflows from U.S. stocks into bonds and emerging market stock funds.

But one place where interest has been strong and stayed strong lately is in variable annuities. Limra, the trade group covering annuity providers, announced that sales of variable annuities climbed in the fourth quarter to $38.5 billion, a 17% gain over the same period the previous year. Among the top selling companies, Prudential (NYSE: PRU) saw sales jump 27% to $6.1 billion, while MetLife (NYSE: MET) sold $5.1 billion, a 38% increase over late 2009 levels.

Unfortunately, annuity sellers have had to take steps to recover the losses they suffered on their annuity products during the financial crisis. Those losses may be part of what motivated Genworth Financial (NYSE: GNW) to stop selling variable annuities. MetLife reduced its guaranteed payout rates, while Prudential raised prices modestly. One analyst said that the threat of upcoming cost increases may have led to accelerated sales at Prudential, MetLife, and Lincoln National (NYSE: LNC), as investors tried to get in before higher costs took effect.

Are variable annuities worth it?
Variable annuities have devoted followers and dedicated opponents, but before you can make an objective analysis, you have to understand how the products actually work. To answer that question, I compared features of a TIAA-CREF variable annuity with a similar low-cost exchange-traded fund.

The TIAA-CREF Intelligent Variable Annuity program lets investors choose from underlying fund portfolios from 14 different money management companies. The investment choices range from active mutual funds with fairly substantial fees to funds like TIAA-CREF's stock index fund, with annual expenses of just 0.09%. The fund's objectives make it comparable to ETFs Vanguard Total Stock Market (NYSE: VTI) and iShares Russell 3000 (NYSE: IWV), which also have relatively low expense ratios.

In addition to the expenses of your underlying fund selection, you also pay an extra charge. Part of the money goes toward annual annuity expense charges and start in a range from 0.25% to 0.50%, depending on how much money you invest. After 10 years, the annuity fee drops to 0.10% annually.

To take advantage of the annuity's guaranteed minimum death benefit provisions, annual expenses rise by another 0.10% of the amount you invest. But those guarantees are what many investors find most valuable, because they help protect against market downturns. In the case of this annuity, the guarantee assures that when you die, your heirs will receive at least the amount you originally invested minus any withdrawals you took. Even if the investments you chose drop in value, the death benefit will essentially recoup those losses.

Pay attention to cost
One reason I chose TIAA-CREF for my comparison is because it has a reputation for low costs. Unlike many annuity companies, it doesn't impose surrender charges if you take withdrawals within the first several years after you open an annuity. But with other providers, those charges can be high. Moreover, insurance companies depend on them; American Equity Investment (NYSE: AEL) got more than half of its net income from surrender charge revenue in 2009.

Variable annuities also give you tax-deferred growth for as long as you keep money inside the annuity. The price of that deferral, though, is that when you withdraw that income, the gains are all treated as ordinary income. That loses the benefit of current lower tax rates on capital gains and dividends that investors in the ETFs above enjoy.

Overall, the concept behind variable annuities makes sense. The difficulty is in finding out the details of these often tricky investments. Too often, companies impose high fees for benefits that aren't worth the cost. But if you find a good provider, a variable annuity may give you exactly what you need.

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Fool contributor Dan Caplinger is still looking for the perfect investment. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is as clear as a sunny day.