WHY AN AILING INSURER NEED NOT INFECT YOUR VARIABLE ANNUITY

If you've stashed some retirement money in a variable annuity, the
recent spate of life insurance company failures may be making you
queasy. After all, when insurers like First Executive Life and Mutual
Benefit Life foundered, customers who held fixed annuities -- those
with preset interest rates -- lost access to their money
indefinitely. Will the same happen to you if your variable's carrier
caves in?
It depends on how you've invested. Most of the investment options
in a typical variable annuity are essentially tax-deferred mutual
funds, which are kept separate from the insurer's balance sheet. That
means your return depends entirely on the performance of the
securities in your variable funds' portfolios -- not on the solvency
of your insurer. As a result, even if your variable's sponsor
sinks, the money in those accounts will remain unaffected.
Problems arise only if your variable also offers a fixed annuity
as one of its investment options. A fixed annuity is backed by the
insurer, and if the company goes under, any money you have in the
fixed option will likely be frozen while regulators look for a
healthy insurer to bail out the insolvent one.
Consider what happened to the two variables associated with Mutual
Benefit when New Jersey regulators took control of the insurer last
July. Though both annuities, Dreyfus Series 2000 and Seligman Mutual
Benefit, suspended new sales, all 12 of their stock, bond and
money-market funds continue to be actively managed, and the annuity
holders are free to switch their money among those options -- or
withdraw it completely -- as they choose. (They are, of course, still
subject to the annuity's standard withdrawal charges and tax rules.)
But the money in each variable's fixed annuity option is frozen until
regulators are able to work out a rescue.
If you're concerned about your insurance company's financial
strength, you can avoid any similar lockup of your money by switching
from your variable's fixed option into its money-market or bond fund
now, before trouble occurs. Keep in mind, though, that most variables
don't allow you to pull out of the fixed investment option until
you've owned it for one to three years. Even then, a few carriers,
such as Guardian Life and Mass Mutual Life, allow you to switch only
25% to 35% of the money out of the fixed option per year. If you're
worried that your insurer may stumble before you've had time to
switch entirely into the other options, you can transfer your entire
annuity account to another insurer tax-free via what's known as a
1035 exchange (an agent for the insurer you're transferring to will
be happy to help you with the paperwork). If you transfer within the
first six or seven years of the contract, however, expect to face
surrender charges ranging from 1% to 7% of the amount withdrawn.
Whatever you do, though, don't just pull all your money out of
your annuity. Withdrawing hastily would expose you not only to
surrender charges but also to income taxes on your investment
earnings, plus a 10% tax penalty if you're under age 59 1/2. -
D.T.D.