The study was commissioned by the National Association for Variable Annuities, a non-profit industry association based in Reston, Va. Its results came as welcome news to those attending the association's annual meeting Oct. 5 through 7 in Washington, D.C.

When the 1998 federal budget took effect Oct. 1, the top capital-gains tax rate was reduced from 28 to 20 percent for property held for more than 18 months. That left many in the insurance industry wondering how variable annuities would fare against mutual funds.

Profits from mutual funds, along with stocks and many other investments, are now taxed at no more than 20 percent. Profits from variable annuities, which are often described as mutual funds in an insurance wrapper, are still taxed as ordinary income -- at rates as high as 39.6 percent.

Price Waterhouse's study found the lower capital-gains tax had little impact on the attractiveness of variable annuities. With the lower tax rate, it now takes an average of 1.3 years more for variable annuities to break even with mutual funds.

An analysis by Morningstar, however, conflicts with the NAVA study. According to Morningstar, which rates mutual funds and variable annuities, those who invest in variable annuities would have to hold onto their policies for at least 20 years just to break even.

In studying the impact of the tax cut, Price Waterhouse used a few assumptions -- which could account for some of the disagreement. For example, the study assumes the average annuity holder is in the 28 percent tax bracket while adding to the policy, and is taxed at 15 percent when the money is withdrawn.

The study also assumes that the vast majority of investors annuitize, turning their money into a stream of payments after they retire. Very few investors actually do so, according to industry figures.

And it doesn't figure in the effects of surrender fees, which investors typically pay if they close a variable annuity in less than seven years, or the 10 percent penalty for withdrawing funds from an annuity before age 59¨. But a Price Waterhouse official who ran the study said the change in holding period may be even smaller if those factors are taken into account.

Other industry analysts say the impact of the tax cut is all a matter of perception, especially since break-even points developed in spreadsheets don't always match human behavior.

NAVA officials were pleased with the results of the study. "Price Waterhouse's findings confirm what we have said all along -- variable annuities are still a very smart option for investors with an eye on the long term," said Mark Mackey, NAVA's president and chief executive officer. Mackey said the study also highlights the "fundamental superiority" of annuities as a way to save for retirement.

Association officials have argued that much of the income from mutual funds comes from short-term capital gains and dividends, which don't benefit from the lower tax rate.

Some investment advisors have been steering their clients away from variable annuities in recent years in anticipation of the tax cut.