The way the new guarantees increasingly work is that the insurance company pays you a guaranteed withdrawal, maybe a 5% to 6% return on your original principal. If the real asset values in the account dwindle in value with the market, you still get that 5% from the base of the original $100,000, $1 million or whatever you paid in. If the assets go up, then even better, as the insurance company will often step up the base, and start paying you 5% off a new tally of, say, $120,000, if the market has gone up 20%.

The insurance company is taking that bet because it assumes, as most people do, that the market will appreciate in the long term. The extra fee allows your clients to pool the risk, hedging you during years of good weather for that one year when three hurricanes strike at once. But is it enough for an insurance carrier to make good on the guarantee when a market tsunami like 2008 strikes
Like everything else in financial planning, the need for it really depends, and there's no cookie-cutter way of selling the product, a point its advocates always stress. A VA could still be a horrible deal, for example, if you're young and your time horizon is 30 years or so. In that amount of time, you would have paid way too much to protect assets that would in all likelihood have grown anyway without your pampering them in an expensive VA lock box. But for a retiree seeking both income and modest capital appreciation, its appeal is undeniable.

More Client Interest?
It's unclear whether the 2008 crash will predispose people toward the product or make the sales pitches more enticing. According to Frank O'Connor, director of insurance solutions at Morningstar in Chicago, investor interest in VAs typically goes up and down with the market itself, which means so far the perception among investors is that it's still just another equities product and so they are staying away. Though fourth quarter results aren't in yet, variable annuity total sales, or premium flows, have been slipping of late. They fell 18.1% to $37.8 billion in the third quarter of 2008 from $46.2 billion in the third quarter of 2007, according to NAVA.

A former variable annuity skeptic, William Garrett of Garrett Financial in Brentwood, Tenn., came around to these products when he crunched numbers on the guarantees a few years ago and said that very often the math was on the side of the newer versions of the product. He now uses them in a very specific way-as a fixed-income alternative to bond ladders. VAs, he says, allow him to keep his clients drawing money on just one part of their portfolios so he can leave the rest to grow normally elsewhere. Even if the performance of the funds in the VA tanks, the worst-case scenario is that a person will get his money back, he says.

"When they put in $100,000, they will automatically be guaranteed that they will be able to get the $100,000 out through withdrawals over time," he says. "It may take 20 years at a 5% maximum withdrawal rate. But that's the worst-case situation."

The popularity of the VAs with guarantees has proved so popular with consumers since the beginning of the decade that many people have wondered skeptically whether the companies would really be able to continue funding them, and indeed, the market turmoil has hit some of the bigger players where they live. Hartford Financial Group, one of the big early participants in this area, has been ensnared in a capital problem caused mainly by the VAs, which have required it to keep huge reserves to keep its guarantee promises.

Meanwhile, the credit crisis has made it more expensive for insurance companies to hedge these products with derivatives. Hartford and others have said they will need to finesse the VAs to make them more profitable. Thus, the benefits have been curbed or fees for the products have begun to tick upward, not only at Hartford but at companies such as AXA and Mass Mutual.

Some clients don't object. "I've talked to my investors and I've told them that future benefits for newer contracts will be reduced," Garrett says. "They usually say that it's very good [because] they take it to mean that the insurance company is doing what it needs to do to protect the guarantees that they have already."

Alternatives
For those advisors in the fee-only space who are not convinced that traditional variable annuity vehicles are bad for the consumer because of the commissions, newer options can make the product more palatable, such as flat-fee or no-load products.

"I would agree with you that if you're looking at a standard variable annuity-they pay 1.5%, 2% on top of the management fees and all that stuff-it's just cost prohibitive," says Chris Chiarella, who uses a flat-fee product offered by Jefferson National. "But if you've got a million bucks and you're only paying $240 a year to Jefferson National and it's a no-load vehicle, that's often a lot less than what you would pay if you have a brokerage account and you want to buy a portfolio of high-quality mutual funds."