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.

Not only is the product the insurance industry's answer to retirement blues, but it addresses their own woes about how to woo back investor dollars. In the 1920s and 1930s, insurance companies were considered a safer place to put your money than a bank. The industry benefited from an influx of cash. But with the advent of the passbook savings account in the 1940s and it's popularity in the 1950s and 1960s, cash flowed out of the industry and back into banks.

In the decades that followed-particularly the 1990s-investors were more focused on accumulating wealth than preserving it. The cash flowed out of passbook savings accounts and into mutual funds and the stock market. Insurance companies were forced to partner with mutual fund companies to survive. But the stock market downturn has investors once again looking for income preservation, and insurance companies want to capitalize on that fear. The fixed immediate annuity is the main weapon in their arsenal.

"We were struggling in the '80s and '90s. We were not the most efficient accumulation vehicles," says Bill Campagna, a vice president at MetLife Financial Services in New York. "But insurance companies are the only ones who can do this type of payout, based on mortality. It's like a private pension, and that has a lot of appeal to people now, when they're seeing their assets going down and their life expectancy going up. It's got a lot of people spooked."

The product suits the insurance industry because it pools risk, something they have been doing for years. While some investors will require that the insurance company pay him $5,000 a year for 20 years, others will opt for the life-only payment stream and die well before they were expected. The insurance company prices its product based on the fact that most 60-year-olds buying it will live another 24.2 years.

Insurance companies are already coming up with their own twists on the product. The Phoenix Companies in Hartford, Conn., for instance, allows investors to increase their annual income by some percentage, so that their monthly checks rise in tandem with the cost of living. Most fixed immediate annuities do not provide for such an adjustment.

"People may be able to manage on the guaranteed income now, but later, they may be pinched by inflation, and that can really affect a standard of living," says Mark Tully, a Phoenix senior vice president and head of annuity distribution. "The biggest knock against this product was that it gave you a level income for life. We got around that with the escalating feature."

But before insurers can tout the product to investors, they must first sell it to their advisors, and that has been the industry's biggest challenge. While the product has received a lot of press and is one of the central topics of conversation at advisor conferences, the financial advisory community is being asked to sell something that is counter to everything they've been taught: Cultivate and grow your base of investor assets, don't give them away. When a broker or advisor sells an investor an annuity, the investor is likely to take assets the broker was managing and hand them over to an insurance company, never to see them again. The broker will receive a 4% cut initially, but it ends there.

"I've been working on the annuity side with advisors since 1994, and there is definitely an increased interest in the dialogue. I'm not yet certain the dialogue is transferring into sales," says Michael Lane, director of TIAA-CREF Advisor Services. "The broker has no incentive to sell it."

Fee-only advisors find the product problematic for a different reason, Lane says. The problem is not that they're being paid only once. It's that they will not be paid at all. They've given away the account, Lane says. "Every time we're in a room with fee or commission brokers and we talk about this, these are the big issues," Lane says.

With those issues, the product is going to have a hard time taking off, Lane says. Fixed immediate annuities are too complicated to pitch investors directly, and advisors are reluctant to sell them, he says.

The other issue is that immediate annuity investors are buying a guarantee from an insurance company, meaning they are placing a bet that the insurance company will be around for a few decades to pay them.

"We had an hour-long discussion with 70 of the top advisors, and one of their biggest concerns was what the impact will be on the insurance companies, from a solvency perspective, when people start living to the age of 100," Lane says. "There's been no precedent where insurance companies, en mass, were in a payout phase. An annuitization is a general account asset. You are completely tied to the solvency of the insurance company."