In this volatile and low-interest-rate environment, it's not surprising that people are flocking to annuities, which pay insurance company guaranteed rates and guaranteed lifetime income.

In the first half of 2011, sales of all types of annuities were up 13%, according to Limra, a Windsor, Conn., research and consulting firm supporting the insurance and financial services industries. A study by the organization released in September showed that 35% of all retirees receive income from an annuity in retirement. And 40% of those retirees say their annuity income is guaranteed for life.

"The majority of current retirees relies primarily on pensions and Social Security to meet their daily expenses, with annuities making up only 4% of their income," says Jafor Iqbal, Limra Retirement Research associate managing director. "But in the coming years, we expect to see fewer Americans retiring with pensions and more relying on their personal savings to fund retirement. Annuities will provide a reliable way to convert that savings into a guaranteed income stream."

A poorly performing stock market is also fueling the use of annuities, according to research by Alessandro Previtero, an assistant finance professor at the University of Western Ontario's Ivey School of Business. Previtero analyzed the actions of more than 100,000 people retiring over six years from 2002 to 2008. The results showed that new retirees are much more likely to purchase an annuity when the stock market has performed poorly over the past year. Conversely, when the stock market has performed well over the past year, people are much more likely to take a lump sum from their retirement plans.

His findings may help explain why people are flocking to variable annuities with guaranteed lifetime withdrawal benefits. Variable annuity sales were up 20% in the first half of 2011, according to Limra. Over half of variable annuity sales are in IRA rollover accounts, according to the Insured Retirement Institute in Arlington, Va. Meanwhile, Limra data reveals that 61% of those who elected a guaranteed living benefit opted for the guaranteed lifetime withdrawal benefit rider. And through June 30, 2011, $315 billion in variable annuity assets included elected guaranteed lifetime withdrawal benefits.

"I think more people are open to looking at annuities after having watched their portfolios plummet from the correction in 2008 and part of 2009," says Greg Womack, an Edmond, Okla.-based financial planner. "People are looking for a safety net for some of their investments. Variable annuities make sense for some and for a portion of their investments. It can provide a guaranteed income benefit."

But advisors must inform clients, he says, that if they cash out their annuities, they get only the current market value. In addition, he notes, the total cost of the variable annuity can be as high as 300 basis points. "It is hard to say if it is worth it or not," he says. "It depends on if it can help [the client] sleep better at night, and if [the client has] other investments ... for liquidity needs."

Clients looking for a low-cost option to stand-alone long-term care insurance are meanwhile turning to combination fixed-annuity, long-term care products. Hybrid annuities typically pay three to four times the amount invested in the fixed annuity for long-term care expenses. As a result, someone who invests $100,000 in the annuity may tap enough to cover three to four years' worth of nursing home expenses.

Following strong double-digit growth in 2009, new premium sales of individual life insurance combination products jumped 62% in 2010, reaching $1.2 billion, according to Limra's research. Catherine Ho, Limra's research actuary, says that if all indications are correct, 2011 should be another strong year for combination annuities.

"Overall, sales of combination products in 2010 were remarkable, especially coming off the double-digit growth experienced in 2009," Ho says. "In addition to carriers boosting their marketing campaigns, consumers' growing desire for an alternative to stand-alone long-term care insurance has driven sales of these products. For some buyers, combination products are a more affordable alternative to stand-alone [long-term care insurance]."

People about ten years from retirement may be interested in the hybrid annuity, suggests a report by the Financial Planning Association. These people may hesitate to buy long-term care insurance, but they are open-minded about investing in a product that combines an annuity with a long-term care policy.

The report cites several reasons: "They don't want to think about long-term care, they figure they can self-insure, they hate the idea of paying premiums when they may never need the coverage, and they worry about possible future increases in their [long-term care] premiums that they couldn't afford."

But Lance Wallach, a Plainview, N.Y.-based financial planner and author of the "CPA's Guide to Life Insurance" (a Bisk Education self-study course), stresses that stand-alone long-term care policies offer better benefit options than a combination policy. The stand-alone policy has features designed to reduce consumer worries about premium increases. In addition, policy premiums may be tax-deductible. Policyholders can also get coverage for longer than just a few years, and the coverage may be indexed to inflation. And there is a return-of-premium rider for those worried they may never activate the benefits.
"I would not recommend any annuity," Wallach says. "Interest rates are too low. People are better off with a long-term care policy and making no-load investments."

Individuals who invest in CDs and high-grade bonds are also putting money in index annuities. Index annuities may pay a portion of the gain on the return of a market index.

Investors put over $15 billion in index annuities, a 16% increase for the year that ended in June. Sheryl Moore, the publisher of AnnuitySpecs, says the reason is that their interest is linked to market performance. Returns are limited, so the insurance company can provide a minimum guarantee on the contract. These annuities are priced to return about 1% to 2% more interest than a fixed annuity. Plus, the index annuities offer a guaranteed 0% floor in addition to a minimum guaranteed surrender value that kicks in when the client cashes out or if the market value of the investment does not perform. At this writing, the minimum guaranteed surrender value offered about 1% to 3% interest on no less than 87.5% of the premiums paid into the contract.

Thomas Brueckner, the president and CEO of Senior Financial Resources, Nashua, N.H., says he invests exclusively in index annuities. Today, Brueckner says, fixed index annuities may have as many as seven different market indices to choose from-not just the S&P 500-in any combination. He can also reallocate or change that mix annually.

"There are now at least three different interest-crediting strategies to employ across those indices, and varying terms, some of which include up-front premium bonuses of 5%, 6%, 10% and even 11%. Bonus products require longer terms, of course, but have been especially popular with retirees fleeing risk-depleted holdings for the stability, guarantees and safety of [fixed index annuities]."

Advisors investing client money in index annuities could be on the right track. Over the past five years, index annuities have served conservative investors well. Over the past five years ended in February 2011, index annuities with a point-to-point annual reset interest crediting method gained a total of 64%, according to Advantage Compendium, a St. Louis-based research company. By contrast, the S&P 500 has grown only 1%.

Brueckner says some of his retirement clients have activated the guaranteed lifetime withdrawal benefits on their index annuities in IRA rollover accounts. Others take advantage of contract rules that let them withdraw 10% or less of their principal annually without paying surrender charges. Some clients let their money grow so they can roll over the account at maturity into another annuity, which pays a premium bonus. And several use split-funding for income and growth.

"Fixed index annuities are not designed to outearn long-term bull markets," Brueckner says. Instead, they capture some of an index's advance. In exchange, they never lose their past interest credits if the market collapses.