If you deliver bad news, you should also deliver remedies.

That's the message I got from readers about my recent column showing that variable annuities did poorly when measured against a simple, low-cost, and flexible index fund investment.

Reader Bill B. wrote: "In a recent article you stated that 'Variable annuities don't actually vary: They lose out every time.' But what options do you have if you already own a variable annuity? For example, can it be converted to an IRA?"

As with most things financial, there is no "one size fits all" answer. But here is a list of alternatives to owning an expensive dog.

You've owned it for a long time, have no product penalties for redeeming, and don't have much in deferred investment gain. This situation, which describes a sorrowful number of variable annuity contract investors, is the equivalent of a "Get Out of Jail Free" card. Without an overhanging tax liability or early withdrawal fee, you are free to do whatever you please.

Find out how much you'll realize in tax deferred income, visit with your accountant, and see if you can tolerate the tax. If, for instance, you've got a contract with a cost basis of $50,000 and an accumulated value of only $75,000, you'll only have to pay taxes on $25,000. If you reinvest the proceeds in some of the lowest cost index mutual funds or exchange traded funds, you'll immediately increase your possible return by the difference between the cost of the variable annuity (typically about 2.20 percent) and the cost of the inexpensive index product (often less than 0.20 percent) --- so you'll be 2 percent a year ahead of the game.

It helps to be at least 59  ½--- then you won't get hit with an IRS penalty on the gain as well.

You've owned it for a long time, have no product penalties for redeeming, but have a monster deferred investment gain. Suppose you've got a variable annuity that has quadrupled in value over the last 20 years. That's only a 7 percent annualized return but it means that you'll have to pay income taxes on $7,500 of gain for each $10,000 of investment value.

That's a big tax hickey. It could also be an IRS penalty if you are under age 59 ½.

If that's the case, you're better off doing a 1035 exchange from your expensive variable annuity to an inexpensive variable annuity. You'll avoid taxes and penalties on any gain and continue to compound tax deferred. Many salespeople will do a 1035 exchange for you--- they do them all the time--- but it will probably be to another high expense variable annuity.

To do this right you'll have to go to a low cost, no-load, self-help variable annuity. The least expensive route is to exchange your high cost annuity for a Vanguard variable annuity that invests in its low cost index funds. Even with the insurance expense, 30 basis points, your total cost will be less than 60 basis points, or 0.6 percent, a year. That will save you about 1.6 percent a year. Vanguard's minimum investment is $5,000, the phone number is 800-523-9954, and you'll be able to build a portfolio choosing from 15 different sub-accounts.

You haven't owned it for a long time, have penalties for redeeming, but have little in deferred investment gain. Here's where you examine the expenses and compare them with the alternative. Surrender charges range up to 9 percent and some portion of that amount can be applied for as long as 12 years. According to the Morningstar Principia database, 6,744 of the 33,040 variable annuity sub-accounts have annual total expenses of at least 2.70 percent. The average total expense of all sub-accounts is a whopping 2.40 percent. If you are in one of those and have a redemption penalty of 8 percent, you'll still be ahead of the game in less than 4 years if you redeem and pay the penalty.

Four years may seem like a long time, but it will often be shorter than the number of years you are still facing a penalty for redeeming from a variable annuity.

Do three examples cover all situations?

Sorry, no. Teachers and others with 403(b) plans have to be careful about triggering penalties on qualified plans as well as redemption fees for individual variable annuity products.

On the web:

Sunday, July 9, 2006: Annuity bait gets fewer bites http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2006/stories/DN-burns_09bus.ART0.State.Edition1.179edb1.html

Variable annuity watch reader: http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/variableannuitywatch/