Disappointing returns and market volatility have soured many investors on their variable annuities, especially if they need access to cash.

But getting out isn't easy. Variable annuity insurance policies typically have high surrender charges and potential tax consequences, so monetizing a policy is not as simple as selling a stock or mutual fund. And while they offer certain benefits, such as tax-deferral of earnings from mutual funds in the account or a guaranteed death benefit, the appeal of a variable annuity fades quickly when high expenses eat into returns, year after year.

"When clients come in with a variable annuity we sit them down with a box of tissues and determine the best course of action," says Christopher Cordaro, chief investment officer at RegentAtlantic Capital in Morristown, New Jersey. "If surrender charges are high that can mean staying put, even if they aren't crazy about what they own."

The industry doesn't publish statistics on the number of people who cash out their variable annuity policy before the surrender charge period expires, but illiquidity doesn't mix well with recessions. People often need the money, and weak market returns have made the typical 2.5 percent or more annual expenses especially painful. (That's 10 to 12 times higher than a low-cost index fund.)

Most of these policies have hefty surrender charges, too. In a typical arrangement, the surrender charge might start at 7 percent of the contract value in the first year and go down one percent each year, until disappearing completely after seven years.

"Too many times I've created financial plans for clients only to have their plans thwarted because they're handcuffed to these contracts that were sold to them, probably inappropriately, by someone who maybe didn't bother to do any research to determine if it was the best option for them," says Amy Jo Lauber of Lauber Financial Planning in West Seneca, New York.

So what should you do with a high-cost variable annuity that's worn out its welcome? Here are some options.

HANG ON

For some, the best choice is to stay put. The upside is that most annuities have a nominal escape hatch in the form of provisions that allow withdrawals of up to 10 percent of the contract value each year without paying a surrender charge, Lauber says.

Tim Holmes, principal of annuity and insurance services at Vanguard, says another reason to stay with an old annuity might be if a guaranteed income benefit or guaranteed death benefit is "in the money," or its guarantee is worth more than the contract value. For example, if a death benefit is $100,000 and the account value has dropped to $75,000 because of poor investment performance, the beneficiary would get the higher guaranteed death benefit amount. That might be especially attractive to someone who's in poor health and can't get a life insurance policy elsewhere.

Similarly, someone tapping an annuity for income through monthly payments would receive payments based on the higher guaranteed amount, not the shrunken value of the investment.

DO AN EXCHANGE

If you're at or near the end of the surrender charge period, exchanging a high-cost annuity for a cheaper, no-load version without surrender charges and lower annual expenses can be a good option, Cordaro says. TIAA-CREF, Fidelity, Charles Schwab and Vanguard are among the companies that offer them.

By doing what's called a 1035 exchange instead of cashing out, the annuity holder postpones ordinary income taxes on investment earnings and avoids a 10 percent federal early withdrawal penalty if he's under age 59 1/2.

"You could hold the annuity until retirement when you're in a lower tax bracket, then cash it in," Cordaro says. "In the meantime, you save a lot of money on annual expenses and still get the benefit of the tax deferral on any earnings."

As Reuters columnist Linda Stern pointed out recently (see http://link.reuters.com/juw35s), the cost of the mutual funds in these products differs widely, so it's important to examine the expenses on the no-load annuity before you make any changes. Vanguard, which offers one of the lowest-cost policies around, has a calculator (http://link.reuters.com/kuw35s) on its website to help determine whether or not a 1035 exchange makes financial sense. "In some cases, it's possible to make up the surrender charge through lower expenses in just a year or so," Holmes says.

New legislation allows you to exchange annuity for a long-term care policy, and any gain on the annuity is not taxable, Lauber says. "This is pretty huge, because most people recognize the risk of potentially needing some form of long-term care, which can quickly wipe out a person's nest egg," she says.

While moving into a lower-cost variable annuity or a long-term care policy might make an exchange an attractive option for some people, it's almost always a bad deal when variable annuity salespeople suggest swapping out an old variable annuity into a newer version with different features. Often, the "bonus credit" they offer to make the sale more appealing isn't enough to offset the entire cost of the surrender charge on the old annuity. And by moving into a new annuity, which may have even higher expenses than the old one, the surrender charge clock gets turned back to day one.

CASH OUT BY SURRENDERING THE POLICY

This might be a good choice if the surrender charge period has expired and the current value of the account is less than what you paid into it. In this scenario, no income taxes are due because there are no gains to tax. And if you're at least 59 1/2, there's no early withdrawal penalty. (Editing by Jilian Mincer and Lauren Young)