With the rush of assets into variable annuities in the past two years, you would never guess they had been around for more than 40. A combination insurance-and-

investment product, variable annuities let investors accumulate assets for retirement tax-deferred, and when they're ready, receive regular payments guaranteed to last

a lifetime.

What has caused a record $43 billion to flow into annuities in 1993 and $14 billion in the first quarter of '94 is that insurance companies, mutual funds, and banks finally figured out how to tap their vast potential. They have beefed up investment choices, so annuities no longer play second fiddle to mutual funds in terms of performance. They have also tinkered with the insurance features, fortifying some of the safety nets and relaxing some of the restrictions. And they have discovered how to market them to a public that wants to defer taxes as long as possible, beat inflation by investing in equities, and still enjoy peace of mind in retirement.

Today's variable annuities provide a flexible way to manage a diverse set of assets without incurring tax liabilities. They also offer unique tools for managing investment risk--a benefit that's more important than ever in turbulent markets.

MIXED BAG. The most important feature is investment performance--where the most exciting developments have occurred. Whereas companies used to offer four or five "subaccounts," such as a stock, fixed-income, balanced, and money market fund, contracts now have an average of eight funds, according to Chicago's Morningstar, which rates mutual funds and annuities. An annuity portfolio can include several kinds of stock funds investing in everything from value stocks to small-caps to international equities. Top-selling Franklin Valuemark has just added a global growth fund and a developing-markets stock fund to its 13-fund lineup. Some companies are also offering funds from several managers. American Skandia is the leader in the "multiple manager" approach, with 35 in its Advisors Choice annuity, including T. Rowe Price, Janus, and Scudder.

But some investors find that having so many options only makes variable annuities more confusing. For them, companies have found ways to simplify the process. Among its 13 funds, Equitable's EQUI-VEST offers three asset-allocation funds for people with different risk tolerances. American Skandia supplies investment advisers with tools to design an asset mix for each client and then automatically rebalance the portfolios, so the desired percentages in different funds are maintained.

Annuities have become more diversified in their fixed-interest accounts as well. SunAmerica's Polaris includes five fixed accounts, all with different guaranteed rates of return, depending on how long you plan to participate. One-year fixed accounts currently yield an average of 5.09%, according to Morningstar, nearly two points higher than money-market funds and better than the average equity fund, which has a negative return of 2.19% this year. But before you transfer assets into the fixed-interest account, keep in mind that money invested there is mingled with the insurer's general account. If the company fails, creditors could lay their hands on it.

If you want to have a fixed account as part of your investment strategy, contracts today make it easy to combine fixed and equity investing. Many companies have plans that use a fixed account to guarantee the principal. For example, a $100,000 investment in SunAmerica's Principal Advantage would include $65,203 in the fixed account, which would be projected to grow to $100,000 in seven years. The remaining $34,797 could be invested aggressively in equities. Metropolitan Life's Preference Plus Account includes automatic-investment features designed for even more conservative investors. With Equity Generator, all the money is put in a fixed account, with just the earnings swept into a growth-stock fund.

SOUPED-UP. Innovations in the insurance parts of variable annuities can help wary investors feel more secure while dabbling in equities. But they also may increase the already hefty insurance expenses, which average 1.26% per contract, according to Morningstar, and are typically higher for the newer, souped-up annuities. "In general, as you add things to the product, the fees will go up," says Dave Nadig, a senior consultant at Cerulli Associates in Boston. If you are looking for a tax-deferred investment vehicle, you don't need to pay for all the extras. But if you are nearing retirement and worried about losing your nest egg, some recent improvements may intrigue you.

For one, insurance companies have revamped the guaranteed death benefit. This comes into play only if you die before the annuity has started paying out. Traditionally, annuity contracts provide that, in the event of your untimely demise, your beneficiaries receive either the value of the contract or at least the amount you contributed. But many contracts now guarantee that even if the market should crash just before you die, your heirs will receive at least the value of what you put in plus a minimum return of 4% or 5%. Other contracts allow you to lock in the amount the investment has grown every five years or so, a feature known as "stepped up" death benefits. Putnam Capital Manager will soon step up death benefits annually.

Companies are also making contracts more attractive by easing restrictions on withdrawing money. Usually, you owe a surrender charge of about 6% if you take out money before about seven years. The penalty drops a point each year after that. Now, contracts may allow you to pull out 10% or 15% in a year without incurring surrender charges. Even better, annuities that are sold by lo-load fund companies such as Dreyfus, Scudder, and Vanguard do not have any surrender charges. But since annuities are long-term investments (and as the government charges a 10% tax on any gains you withdraw before age 591/2), you should not buy one unless you have other liquid assets to tap if need be.

LUMP SUM. Insurance companies have also devised payout options that may interest you if you need your annuity to generate income. For example, Keyport Life's Preferred Income Plan guarantees income through age 100. With this "period certain" annuity, you effectively get payments for life, plus you gain the option of cashing in the annuity for a lump sum of cash at any time. You can also be fairly sure your heirs will get something from the annuity, since if you die before 100, they get the remainder.

A new generation of "immediate" variable annuities has cropped up in the past year, emphasizing how much flexibility there is in the payout stage. They provide for an immediate income stream upon deposit of a large lump sum--at least $25,000 for Fidelity Investments' Income Advantage. They are being marketed to retirees who want to invest in stocks yet be assured of receiving regular payments.

Variable annuities still have plenty of drawbacks. If you do not hold an annuity for more than six years, the fees will probably add up to more than you gain in tax deferral, and you should stick to mutual funds. If you haven't already maximized contributions to your individual retirement account, 401(k), or other qualified plan, you should do that before buying an annuity. But if you decided against buying a variable annuity in the past because you didn't like the investment options available, take a look at today's offerings. You might find just what you are looking for.

      Contract        Description
      AMERICAN        "Advisors Choice" allows you to choose among 35
      SKANDIA         subaccounts managed by different investment firms.
      ADVISORS PLAN   It also provides automatic rebalancing of assets when
      800 SKANDIA     they deviate from the determined formula.
      FIDELITY        Part of a new generation of "immediate annuities"
      INCOME          that allow retirees who have already accumulated a
      ADVANTAGE       nest egg to invest in equities and get a steady stream
      800 544-2442    of income guaranteed for life.
      KEYPORT         The "Preferred Income Plan" guarantees income up to
      PREFERRED       age 100. If you die before then, the value remaining
      ADVISOR         is paid to your heirs. You effectively maintain the
      800 367-3653    promise of lifetime income but have  the right to cash in
                      the annuity for a lump sum at any time.
      METLIFE         Automatic investment programs aim to ease people
      PREFERENCE      into equities. With the "Equity Generator," all the
      PLUS            money is invested in a fixed account, and earnings
      ACCOUNT         are swept into a growth-stock fund. With the
      800 MET-LIFE    "Equalizer," money is split between equity and fixed-
                      income accounts and rebalanced each quarter.
      PUTNAM          This plan transformed the guaranteed death benefit. If
      CAPITAL         you die before the annuity starts paying out, your heirs
      MANAGER         receive the current value of the contract or the value at
      800 521-0538    your last anniversary date, whichever is higher.
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