More people are buying annuities, but some advisors are skeptical.

Retirees and near-retirees have watched their stock and IRA accounts erode before their eyes for three years in a row. As the psychological pendulum swings from embracing risk to averting it, the notion of investments that claim to offer guarantees is gaining more appeal.

The insurance industry claims to have the answer, and it's called the immediate fixed annuity. It works like this: You give an insurance company a lump sum, say $100,000, and you can receive a constant stream of cash until the day you die. Investors decide how frequently they want to receive checks and for how many years they want to guarantee they will receive payments. Obviously, if two investors put down $100,000 and one wants guaranteed monthly payments for 10 years while the other wants them for 20, the investor wanting a 20-year guarantee will receive smaller monthly checks.

The annual income varies, depending on what kind of money was used to create the annuity. If the account is set up with regular income that has already been taxed, the investor's annual net income would be larger than if the investor had used money from an IRA or other source of funds that hasn't yet been taxed. The minimum investment is usually $10,000, although most people set them up with $100,000 or more.

The tax advantages give investors a bigger bang for their buck, exceeding what they're likely to earn if they tried to live off the interest generated by CDs or bonds. A 60-year-old who puts $100,000 of savings into a CD, for instance, might earn 5% a year or about $5,000-the equivalent of about $400 a month-but he will be taxed on the entire sum. If IRA money were used to set up an immediate fixed annuity, and the investor stipulated that he should be paid for the rest of his life, the annual payment would be about $7,553, or $629.48 a month, but the payments would also be taxed. If the annuity was set up with cash that had already been taxed, or what are "nonqualified assets," the investor would only be taxed on 45% of it, or $3,400. That's because each check is part principal, part interest, so only a portion of it is taxed.

"They're growing faster than any other retirement product," says Randy Rowray, a marketing consultant for The National Benefit Corp. in Des Moines, Iowa. "They're so popular because clients get a higher payout and a lower tax bill-if they use non-IRA money-than they would on something like a CD."

The risk, of course, is if the 60-year-old drops dead at 61. The investor in the above example had chosen a fixed annuity with a "life-only" option, meaning it pays for as long as he is alive. If he dies at 61, the first $7,553 check will have been his last, and the insurance company keeps the rest of his $100,000 investment. The option is so risky that most advisors and many insurers advise against it. What many investors are opting for are lifetime policies with 20-year guarantees. That way, if they die after one year, their wives or children will continue to receive income for 19 more years.

"Immediate annuities or an annuitization is the only product that provides a lifetime income stream," says Kim McSheridan, vice president of SAFECO Life Insurance Co. in Redmond, Wash. "Other products will provide periodic payments, like a deferred account where you sweep out the interest regularly or an account where you make regular withdrawals. But the only product that can guarantee you income for life is an immediate annuity."

McSheridan says SAFECO's immediate annuity sales are up 200% this year over last, but she admits the market was not that large to begin with. SAFECO's annuity sales are comparable to those of other insurers, she says. The allure, McSheridan says, is that the product locks the investor into a constant income stream. The disadvantage, she says, is that the product locks the investor into an income stream. Some people don't like to have their money locked up.

"Once it's in there, you can't get it out," she says.

Those pitching fixed immediate annuities stress that investors should not place more than 25% of their retirement savings into the product. The remainder should be kept in a diversified portfolio of bonds, stocks and other investment vehicles that will enable the assets to grow.