Perhaps the best use for annuities, he notes, is creditor protection for high-profile clients or those in litigious professions. But protection from creditors varies from state to state. In some states, including Florida, variable annuities are exempt from being tapped to pay court judgments.

In most cases, however, Bauerle says he considers the expenses and restrictions of variable annuities unsuitable for clients. If he puts a client into a variable annuity, in most cases it's because he's moving them out of another annuity that he considers too expensive.

Such tax-free exchanges, allowed by Section 1035 of the Internal Revenue Code, sometimes require a client to cough up a surrender charge but are still worthwhile, he says. "I had a man come in here a year ago who had all his money, $900,000, in five variable annuities," he says.

"He did it all at one time with one agent." Bauerle was able to take most of those assets and put them into a TIAA-CREF annuity with an expense ratio of about 30 basis points, compared with an average of 160 basis points on his original annuities. "If you have to stay in an annuity, the lower you can get those expenses, the better off you are," he says.

So many independent fee-only advisors are involved in Section 1035 exchanges that some issuers are trying to cultivate this segment of the market. Ameritas Life Insurance Corp., for example, offers a no-load variable annuity, which carries no surrender charges, with an expense ratio of about 0.55%. That's slightly less than half the industry's average mortality and expense charge, says Patty Reiners, manager of Ameritas Direct Advisor Services. The annuity, available since 1997, has doubled in assets during the past year-largely due to its use in Section 1035 transfers.

Another use for the no-load annuity, she says, is in cases in which investors have no further use for the death-benefit protection of a life insurance policy. This is particularly true in cases where the policy's cash value is worth less than its cost basis, she notes. She cited the example of someone who has put $50,000 into a universal life policy that has a cash surrender value of $10,000. The $10,000 may be transferred to a variable annuity under Section 1035, and another $40,000 in future earnings-representing the balance of the cost basis-would be tax sheltered. The one drawback to such an exchange, she noted, is that death benefits pass on to beneficiaries tax-free, while the value of the annuity would be subject to income taxes upon death.

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