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Variable annuities and the stock market: Should you hang on for the ride?

The Dow Jones Industrial Average has been up and down, losing 12.7 percent between March 2000 and March 2001. If you own a variable annuity, in which your investment value depends on stock market performance, should you be worried?

Most analysts and insurance companies say that variable annuities (VAs) are long-term investments, and you should be able to ride out the stock market's highs and lows until retirement. Of course, you might need to tap into the money soon, or simply be too squeamish about the current market volatility. If that's the case, you may consider moving your money into conservative subaccounts until the market seems more stable.

Long-term goals can outweigh short-term stability

Think carefully before moving your VA money around, because pulling your money out of risky investments during a market downswing means you could miss out on potentially large returns when the market rebounds. Even if you are retiring and annuitizing soon, you will need investments that beat the rate of inflation.

If you still can't stomach the market's unpredictable performance, you can move your subaccounts from more aggressive growth funds to conservative funds, such as money markets, says Deborah Tucker, assistant vice president of communications for the National Association of Variable Annuities (NAVA).

"In this kind of market, there's an advantage for people with variable annuities because they can change the mix of investments on a tax-free basis," Tucker says. "Depending upon your investment decision, you are able to change your portfolio from aggressive to conservative."

Ask your insurer, or read your annuity contract, to find out whether you will be charged a fee for changing subaccounts. Some may charge $20 to $25 to move your money, while others may grant you a certain number of free transfers or even waive fees if you have a minimum amount in your annuity.

Tucker says fixed investment options can provide peace of mind for variable annuity investors. These allow you to allocate money among subaccounts and to a fixed option that guarantees a minimum rate of return on your investment regardless of the market's performance. Guaranteed minimum income benefits can also provide a minimum level of income from annuity payouts, even if the stock market plunges.

Your VA: Should it stay or should it go?

A VA owner's other option is to switch to a fixed annuity with a guaranteed rate of interest. You may have to pay a surrender fee to get out of the contract, unless your variable annuity comes with the option to switch to a fixed annuity at no extra cost (although this option may cost a certain percentage of your investment). If you're certain you want to change your investment strategy permanently, it might be worth the surrender fees to do so, but make sure you've considered every option first.

If you don't have a variable annuity, should you even consider buying one? NAVA's sales figures show variable annuity sales decreasing from $36.5 billion in the first quarter of 2000 to $30.6 billion in the fourth quarter, so some consumers are shying away from variable annuities during tough market conditions. Whether a variable annuity is right for you depends on your financial goals, your risk tolerance, and your time horizon for investing.

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