L.A. brokers battle for hot-selling annuities market.

Variable annuities account for 40% of all premiums

Los Angeles insurance and securities brokers are slugging it out to feed the growing appetite for variable annuity products. Variable annuities -- which are insurance-protected investment products that provide tax-deferred earnings -- are enjoying widespread popularity fueled by a growing nationwide sentiment that taxes and inflation will rise during the Clinton presidency.

Annuities provide protection against taxes because buyers can roll over their capital gains and do not pay taxes on those gains until the money is distributed.

Likewise, many investors believe annuities provide a hedge against inflation because annuities, if properly structured and managed, provide higher returns than time deposits or government bonds.

The stakes are huge. About 40 percent of the insurance industry's total nationwide premiums comes from the sale of variable annuities. And about 10 percent of the securities industry's total nationwide business comes from variable annuities, estimated industry experts.

In fact, so many companies are now jumping on the bandwagon by offering so many different varieties of variable annuities that investment specialists are warning, caveat emptor.

Buyers should carefully evaluate their own needs and examine the fee structure of the company managing the variable annuity before signing up, experts suggested. Some unwary buyers have been stung badly by heavy commission and fee schedules, incompetent investment advice and severe penalties for early withdrawal.

"Between sales charges investors pay when their money is shifted from one investment to another, IRS penalties for early withdrawal if the investor needs the money in an emergency, annual service fees and administration fees, investors can see the value of their plan drop quickly if their variable annuity plan is not structured properly," warned Jeff Saccacio, director of personal financial planning at Big Six accounting firm Coopers & Lybrand.

The major forces driving the variable annuities craze are retirees and executives who have topped out on their qualified retirement plans, Saccacio added.

Unlike contributions to an Individual Retirement Account or 401K, part of the regular contribution to a variable annuity goes toward paying the premium on an insurance policy that will pay the investor's heirs the market value of investments or the total dollars paid into the account, which ever is greater, if the investor dies before pulling out the funds.

Despite warnings from conservative investment consultants, insurance and securities salesmen are pitching variable annuities as vociferously as ever. "Annuity sales are 40 percent of our total sales now," said Emile Bayle, an agent for the Los Angeles office of Mutual of New York.

Growing fears that Social Security benefits will not provide retirees with enough income to support a comfortable lifestyle have contributed to the boost in local sales of variable annuities, Bayle said.

Unlike contributions to individual retirement accounts and 401Ks, which are made with pre-tax dollars, contributions to variable annuities are made with post-tax dollars.

Some investment analysts have criticized variable annuities because they generally carry high brokerage fees and heavy penalties if funds are withdrawn before investors turn 59 and a half years old. On the up side, investors do not have to pay taxes on any of the capital gains until the money is distributed.

Insurance agent Bayle touted the versatility of annuities by pointing out their payout schedule can be structured many ways. Some annuities are structured so the buyer gets the income for life, Bayle said, while others are structured to distribute the money over a specific number of years.

Even so, Bob Wackman, a partner in the Century City personal finance and management group of Big Six accounting firm Price Waterhouse, warned investors against buying heavily into variable annuities unless they have carefully thought through their investment and retirement strategies.

"Individuals, with their long-term goals in mind, should make all their own investment decisions, not insurance agents or securities brokers," Wackman said.

John Hood, manager of the mutual funds and insurance department for Los Angeles-based Crowell Weedon & Co. does not agree with Wackman.

Anyone who sells variable annuities must have an insurance license and a securities license, Hood pointed out. But even Hood argued that not all those who sell variable annuities are equal. "Who would you rather have managing your investments, somebody with years of experience in the insurance industry or years of experience in the securities industry?" Hood queried, intimating that securities brokers are better educated on investment matters.

While Hood, who has worked in the securities business since 1945, admitted management fees and commissions paid to managers of variable annuities can mount up quickly, he challenged consultants' claims that well managed mutual funds are scarce. (The bulk of annuity funds are invested in stock and bond mutual funds.)