(Dow Jones) Rick Miller says immediate-payout annuities adjusted for inflation are underused products that make sense for those who are entering retirement and worry about stock-market volatility.

Miller, who runs Sensible Financial Planning in Cambridge, Mass., isn't talking about variable annuities, vehicles he characterizes as high-commission mutual funds managed by insurance companies. Rather, he's referring to immediate-payout annuities (sometimes called single-premium immediate annuities, or SPIAs), which provide lifetime income in return for a one-time payment.

Miller recommends inflation-adjusted immediate-payout annuities only: They cost more but provide a safeguard for spending power.

The rub, however, is that, as insurance products, most immediate-payout annuities are guaranteed by insurers only up to $100,000. So if your insurance company fails--and several big ones came close to going belly up last year--$100,000 is the most you can be sure of reclaiming, no matter how much you had in the vehicle.

"It's clearly not enough coverage," says Miller, a certified financial planner with a PhD in economics from the University of Chicago. "If I put $100,000 in an annuity at age 70, I might get $6,000 a year from that." Realistically, an annuity investment might be on the order of $1 million (generating perhaps $60,000 a year before inflation adjustments)--but then clients are risking a huge loss if the company goes belly up.

"As I think about protecting my clients, this is a big issue," says Miller. "Will they be covered against potential mismanagement?"

He points out that while it's possible to buy multiple $100,000 annuities from different companies, most states insure up to only three policies per person. So, a couple could buy three $100,000 policies each, for a total of $600,000. Anything beyond that carries some risk--and the whole point of payout annuities is to mitigate risk.

Furthermore, says Miller, the current system works against insurers. "Let's say MetLife offers the best and most competitive plan for my client," he says. "I might want to give MetLife the whole annuity--but I can't because it's too risky. I have to spread it out."

While some states already cover more for immediate-payout annuities, Miller says states should increase the level of coverage; greater transparency in annuity funding and management also would help.

"Insurance companies say they pay annuities out of their general fund, so they're protected by the solvency of the big company," he says. "But the organization is so arcane--this company reports to that company which is owned by the following company. And frequently when insurers start a new product they set up another new company."

Though immediate-payout annuities aren't exactly hot items, Miller feels that could change. "With the decline of company pensions, many academic economists are seeing payout annuities as one of the best ways to secure a guaranteed income in retirement. So if as a country we are serious about protecting at least some personal wealth outside of the stock market, we need to step up and fix this."

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