Yet mixing mutual fund-like investments with insurance to create a retirement product will usually call for layer upon layer of expenses. If you had the stamina to compare the 1,100 variable annuity contracts listed on Internet sites, you would find just a handful of low-cost products. In fact, nearly all variable annuities are loaded down with onerous sales fees, high annual expenses and stiff surrender charges on withdrawals made during the initial years of ownership.

A withdrawal made before age 59½ will also cost you a 10 percent tax penalty, plus ordinary income taxes - as high as 35 percent - on any long-term capital gains earned in the annuity. If you recently acquired a variable annuity, glancing through the prospectus could give you a case of buyer's remorse: Were you told about the steep commission? (It can total 10 percent of the initial investment.

) Were the annual expenses explained? You may be paying up to 3 percent of assets for management and marketing, and a hefty fee of 1.85 percent for insurance features, according to Limra International, an insurance industry research group.

Surely you were told that withdrawing money during the first year of the contract will trigger a surrender charge. The average charge is 5 percent, but it can run as high as 17 percent. While surrender fees decline over time, they often don't vanish for seven, eight or as much as 10 years.

Who should be buying these insurance contracts? Variable annuities can make sense for a younger saver who's already maxed out IRAs and 401(k)s, or for those who have no access to such tax-deferred accounts. Putting aside additional money where it can grow tax-free for several decades should compensate for the higher cost of a variable annuity.

Despite their daunting drawbacks, variable annuities are being aggressively marketed as a conservative choice for older buy-and-hold investors. The insurance feature, which has a strong appeal to some retirees, is that heirs will receive at least the initial amount invested, or the entire value of the underlying stock or bond account, including investment gains, if it is larger. This leaves the beneficiary with a big problem - having to pay all the taxes that were deferred on the annuity.

In contrast, the beneficiary of a mutual fund would owe no taxes on the gains because their cost basis is "stepped-up" at death. Alternatives might be municipal bonds, Treasuries or CDs "laddered" to mature in one to five years. When a maturity date is reached, the cash is redeployed into a new five-year product.

Consider opting out of a high-cost annuity through a "1035 exchange." If you've owned a high-expense variable annuity for several years, consider doing a tax-free transfer to a low-cost annuity, one that has good investment options. Just be sure the transaction won't result in surrender charges.

Before attempting this type of swap, also known as a 1035 exchange, you'll need to do some homework. Make comparisons by contacting mutual fund families such as Vanguard Group, T. Rowe Price, TIAA-CREF and Fidelity Investments.

All offer annuities that have no sales fees, no surrender charges and low annual expenses. If you have a Lessons Learned topic to suggest, you can call Gene Kelly at 421-2861, write to him at 2611 Bretigne Circle, Lincoln 68512, or e-mail him at ck62819 ;alltel.net.

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Pick of the Litter contest Yet mixing mutual fund-like investments with insurance to create a retirement product will usually call for layer upon layer of expenses.