Variable Annuity Expenses: Your proposal for a variable annuity policy from Company X and the prospectus you have forwarded with it show expenses and charges that could be significantly reduced or avoided with a similar annuity from a “no-load” company (i.e., one with no-commission products).

All investments have some costs associated with them, but most variable annuities have inordinately high expenses, and this one is a prime example. Based on our review of the information provided, the expenses in this annuity break down as follows.

Mortality & Expense Risk Charge — 1.25%

Administrative Charge — .25%

Added Charge for “Highest Value” Death Benefit — .20%

Total Costs before Fund Expense Costs — 1.65%

Comparable expenses from a “no-load” variable annuity could eliminate about three-fourths of those expenses, with charges of about .45% for a similar annuity. A variable annuity from one well-known no-load company, for example, would have comparative costs of .42% - .20% for the mortality and expense risk charge, .10% for an administrative charge, and .12% to guarantee the highest annual account value in the case of the annuitant’s death before the annuity’s distribution phase.

With a $100,000 annuity, for example, you would be paying extra and unnecessary expenses of over $1,200 annually to invest in the proposed annuity rather than in a no-load annuity. Based on the amount you are considering investing in this vehicle, your added expenses would actually be $ ___ annually.

Investment Management Expenses: In addition to the internal annuity expenses of 1.65% of the account value, you would have annual investment management expenses ranging between .30% and 1.2%, depending on your investment choices within the annuity. With most no-load annuities, the investment management expenses for comparable investment funds are lower and may range from .10% to 1.0%. So you should save an average of .20% annually in investment management expenses, or $200 every year for each $100,000 invested, by investing in a no-load annuity – in addition to the savings on internal annuity charges outlined above.

Surrender Charges: Another reason to choose a no-load annuity over the more expensive kind such as you are considering is the avoidance of surrender charges. Your annuity proposal shows surrender charges as high as 7 percent of the account value in the first year and declining by 1 percent each year. Surrender charges effectively lock you into this investment for an initial period of years because of the prohibitive cost of exchanging the annuity for another one or of surrendering it altogether. A no-load annuity would give you the flexibility to make a change without incurring the surrender cost.

The Tax Treatment of Variable Annuities: The tax treatment of variable annuities, as well as their costs, should prompt second thoughts about whether they are appropriate investments for many consumers, especially those in higher tax brackets. A tax disadvantage of variable annuities is that, while taxes are deferred until money is withdrawn, earnings within them are eventually taxed at ordinary income rates - even when they consist of dividends and long-term capital gains.

Normally, under today’s Federal income tax laws, dividends and long-term capital gains are taxed at just 15 percent. For those who are, or anticipate being, in a relatively high Federal income tax when the earnings are withdrawn from a variable annuity, the tax deferral afforded by the annuity comes with the price of a higher tax rate – at least much higher than that which applies today for dividends and long-term capital gains.

No one can predict with certainty how capital gains and dividends might be taxed in the future, or whether there might even be, at some point, a lower than ordinary income tax rate applied to the earnings within a variable annuity, as has been proposed. For now, the differing and unfavorable tax treatment of dividends and capital gains within a variable annuity is a reason that those in a high tax bracket should, at a minimum, think twice about whether to invest in them and perhaps should avoid them altogether. This is especially true for those who are not likely to use the insurance feature of an annuity that can assure a lifetime distribution of periodic income for as long as one might live.

But the insurance function of an annuity – generating a lifetime distribution of regular income – does not require an investment in a deferred annuity currently. It is also available at any time later in life by purchasing one or more “immediate” annuities with portions of one’s current savings. “Immediate” annuities, unlike “deferred” annuities of the sort that has been proposed, are those which are purchased with a single premium and then begin distributions within a year of that investment. Immediate annuity distributions, as well as eventual withdrawals from a deferred annuity, may be selected to last for the life of the annuitant (including for as long as either spouse is living in the case of a “joint and survivor” annuity) and, often also, for at least a certain period of years if the annuitant should die before that time period ends.

If you like, please call to discuss our findings and suggestions and the additional ways we can help you determine whether an annuity investment is appropriate for you, and, if so, which one, considering various features and their expenses, will most likely give you the best results.