No. of Recommendations: 7
It's not often that this quintessential "Wise" publication gives "Foolish" advice, but today's issue has an abundance of it:

Here's a sample of Barrons' take on variable annuities:


Slam the door shut, they come in through the window. As Baby Boomers have turned away from whole life insurance in favor of more cost-effective term insurance, insurers have discovered a new way to tap the consumer's pocketbook: variable annuities.

As you probably know, variable annuities allow investors to sock away an unlimited amount of money for retirement. And because these fund investments come wrapped in an insurance policy, the money grows tax-deferred until you withdraw it for retirement. So if you skimped on your 401(k) and your IRA back in the 1980s and early 'Nineties and now find yourself bumping up against the annual contribution limits -- $10,500 for 401(k)s and $2,000 for IRAs -- variable annuities offer you a way to catch up in a hurry. Just throw $100,000 of your bonus money into a VA and you're back in the game.

"Annuities are recognized as being an important part of the solution to the retirement savings crisis in America," crows Mark Mackey, president of the National Association of Variable Annuities, a trade group.

No wonder, then, that variable annuities are the fastest-selling investment product on the market. Since 1995, they've grown at a 23% annual clip, reeling in $421 billion. And sales are expected to continue growing at 10%-15% a year through 2002. Among the biggest beneficiaries are Hartford Life, Equitable Life and Nationwide Financial Services.

But put annuities under a microscope and what you'll find are some of the most oversold, overpriced and misused financial products on the market. For starters, the fees on variable annuities are huge, averaging 2.11% a year, compared with 0.83% for the average mutual fund and as little as 0.18% for index funds. On top of that, a laundry list of rules and charges make it prohibitively expensive for you to pull money out early. And, when you do take the money out, the gains will be taxed as ordinary income, rather than at the lower capital-gains tax rate. Finally, if you die with money in an annuity, your heirs won't get a stepped-up basis, as they do with stocks and stock funds. (See sidebar.)

Of course, you're not likely to hear any of that when you sit down with a broker, insurance agent or a financial planner, because, like whole-life policies before them, variable annuities are sold, not bought. And nothing sells like a tax shelter and the fear that the bull stock market will come crashing down. And no other investment product gives sales agents a fatter commission. A broker usually pockets a fee of 5%-8% when selling an annuity contract, a payoff hard to come by now that online brokers and others are squeezing commissions on stocks and mutual funds."



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