Hedging Bets For Your Retirement

Pay special attention to the individual variable-annuity contract. This idea will be big in the 2005-80 period, and may be worth a look. It's a long-range retirement planning idea, and already is available in enough variety to let you do some sensible shopping around.

After long delay, some big names in life insurance Aetna

Life & Casualty, Travelers, Lincoln, State Mutual, Paul Revere, Connecticut General, and British General, among others - are now selling directly or through subsidiaries. Prudential, Connecticut Mutual, Massachusetts Mutual, and New England Mutual are part of a sizable list of top companies that are in this business now or will move in soon.

But note: The individual variable contract - which is strictly a retirement-income investment, not ordinary life insurance - is variable in more ways than one. As noted above, the annuity payout is pegged to the performance of a common-stock portfolio. But the fine print varies from policy to policy, too.

When you buy such a contract, you're generally guaranteed an undetermined retirement income for as long as you, or you and your wife, live. You pay a fixed amount each year until age 65; your cash goes largely or wholly into common stocks. The advantages can add up:

You have a chance to ride up with inflation, and you pay no current tax on the stocks' appreciation or dividend build up before retirement.

You'll be taxed on the yearly payout, but this comes when you're probably in a lower bracket; whatever you've paid in comes back to you tax-free.

Your heirs get a break. Should you die before age. 65, usually they get the current market value of your shares or the total premiums paid to date - whichever is greater.

If you don't want all your cash in equity investments, you can hedge and buy a portfolio mix: 50% in common stocks, say, and 50% in bonds and mortgages. Some companies let you vary the mix as you choose.

Here's an example of how a variable might come out. Based on past performance of the Aetna 100% variable portfolio (about 95% in commons), a man of 50 who put in £3,000 a year over the past 15 years would today have a fund of over £100,000. He would now begin to draw about £700 a month.

The result you get will depend on the items in the portfolio, its management - and on continued inflation. Says one pro: "You really bet that the stock market won't lag behind inflation."

You must also make sure that the fine print doesn't cross you up. For instance, there's the front-end load problem. You'll lose if you cancel the contract in the first few years, because sales commission and fees are taken out. The load varies. With Travellers, for instance, it comes to roughly 9% of the first year's premium. But some companies go to 15% or 20%, even higher.

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Gearing Your Insurance To Inflation

What about life insurance vs. retirement-income plans? "Gearing up the old retirement plan to meet inflation is the big news," says a top independent insurance consultant in London. You don't necessarily need more life coverage - in fact, you could be overinsured. But updating coverage in line with some new policies on the market makes sense. At the same time, you might sidestep a pitfall or two.

There is the "variable annuity" to consider. The new type of retirement plan that pays out a variable amount of income each month - depending on the performance of a common-stock portfolio - gives you three choices:

Combination life insurance and mutual fund packages. Variable annuities... see: Gearing Your Insurance To Inflation