One of the many ripple effects of last year's dismal stock market was felt in the life insurance industry. Variable-annuity sales, the lone growth engine for many insurers, took a dip for the first time in 13 years.

Sales are so soft, in fact, that annuity issuers are adding a number of enticements to their products. Advisors say they're seeing a host of new offerings, including enhanced death benefits, a greater diversity of investment options and riders designed to reduce customer exposure to stock market volatility. With so many new choices, however, advisors may find themselves faced with a key question: Are the benefits worth the costs, which vary widely?

"It seems that these annuities are filled with bells and whistles now. You name it, and it's out there," says Todd Schoenberger, senior director at, which specializes in the sale of low-cost, no-load annuities. "But how much am I paying? That's the question the individual client has to ask. Remember, you're not going to get something for nothing."

The question actually underscores a controversial topic in planning circles-whether variable annuities are worthwhile at all. Advisors are divided on the question. Some find the tax deferrals and lifetime guaranteed income provided by annuities a useful tool in some circumstances. Others find them too expensive, illiquid and inflexible, and their tax benefits overrated.

The variable-annuity industry, in fact, was planning to attack the issue head-on last year with a three-year $37 million advertising campaign designed to sell the merits of annuities to consumers and advisors. As the market continued to soften, however, participating companies decided to pull out of the project and rely on their own branding efforts. The campaign was canceled abruptly.

Although year-end figures have not been released, annuity sales were down 20.5% as of the end of September. Fourth-quarter results also were expected to fall short of a year earlier. Some leading independent brokerages report sales were off as much as 40%.

The industry also suffered a 20% decline in annuity assets as of the end of September, making the termination of the proposed marketing campaign inevitable. "We were never able to get funding," says Deborah Tucker, spokeswoman for the National Association for Variable Annuities (NAVA). "The timing could not have been worse for us."

But that hasn't stopped the industry from touting the use of annuities in retirement planning. In a widely disputed study commissioned by NAVA, PriceWaterhouseCoopers concluded that a 65-year-old retiree could earn between 32.3% and 94.4% more after-tax income by selecting a pure life variable annuity as opposed to a mutual fund to supplement qualified retirement accounts and Social Security. The mutual fund returns were based on a portfolio of growth, balanced, bond and specialty funds.

A greater number of investment options also is making annuities more attractive, Tucker says. The typical variable-annuity contract now contains from 30 to 40 investment options, compared with about five options a decade ago, she says. "One of the things this market has shown people is that it is a very solid investment vehicle in a volatile market," Tucker says. "It gives you the ability to easily, on a nontax consequential basis, move between different investment options."

The industry, she says, also has been unbundling features over the past few years, providing advisors with a greater number of "a la carte" selections to more specifically meet client needs and, in some cases, reduce the vehicle's expenses. Chris Cooper, president of Chris Cooper & Co. in Toledo, Ohio, views the greater diversity of investment options as the greatest single change in the annuity market.

That's partly because the selections were previously very poor, he says. "It takes an insurance company two or three years to get a product out the door," Cooper says. "The ones from 1998 to 2000 were reflecting the stock market of '95 to '97. It was aggressive stuff with a lot of technology. They didn't have hardly any diversification."

That left some annuity holders adrift during 2000 without a paddle, he says, and partly explains why the market suffered last year. Now, subaccount offerings are starting to include more diversity, expanding the selection of bond and growth and income funds. "You're also seeing some other fun things in them, like Dogs of the Dow and targeted types of funds that are market-timing-oriented," he says.

Issuers also are heavily promoting "bonus credits," but these should be scrutinized carefully, Cooper says. While this feature will give investors a bonus on their upfront investment, they often drive up the expense ratio of the annuity. Bonus credits are so tricky, in fact, that the Securities and Exchange Commission has warned consumers to view them with caution.

Cooper says the credits can be helpful to those who want to strip money from one annuity and put it into another. In this case, the credit offsets any surrender charges imposed from canceling the first annuity. "It can be beneficial if the client's in a really bad annuity or in a weak company with bad financial ratings," Cooper says. Other instances where this strategy is useful are when a client is trapped in a product with no diversification or one with expenses that are so high they're nullifying any returns.

Some advisors have been impressed by some of the newer death benefit enhancements.

"Up until this year, I had never sold a variable annuity," says Herbert Daroff of Baystate Financial Services in Boston. "The basic problem I always had with annuities in taxable estates is there was no stepped-up basis."

New riders have addressed that concern by easing the income tax hit on annuity death benefits. Daroff says he's seen riders that will step up the death benefit of the annuity 5by 40% to 50%-essentially paying the income tax on the benefit.

Even though such protection may cost an extra 1% in annual fees, there are many cases in which the added cost would be worth it, Daroff says. "It's basically the annuity companies listening to financial planners," he says. "They went to various financial planners and said, 'Why aren't you selling annuities?'"

Daroff also sees benefits in new riders that address concerns of the risk averse at a time of high stock market volatility. There is now a broad selection of riders that will allow annuitants to lock in a favorable rate of return for when they are ready to annuitize. "As a cherry on top, the most current available will also offer a guaranteed minimum rate of return," he says, adding that a typical rider might provide a 6% floor.

Whether this will all lead to a resurgence in annuity sales remains to be seen. Schoenberger, for instance, feels advisors are more concerned about cost rather than fancy new features. "Advisors are actually looking for lower-cost products, especially in this volatile market," he says.

Then there are advisors who still aren't convinced annuities are worth it-and who feel commission-based sales have led to an overutilization of the products. "I think most of the people in the fee-only camp don't feel like an annuity is the best use of a client's dollar," says Stewart Welch III, president of the fee-only Welch Group in Birmingham, Ala.

High expenses are one reason Welch stays away from annuities. He's also turned off by the way annuities expose long-term capital gains to ordinary income tax.

And even 40 investment options is too limited a pool of choices, he says. "Ultimately, what is going to drive wealth is going to be choosing top managers," he says. "So we suggest you have a better chance of finding and keeping managers if you're fishing in a large ocean rather than in a small pond."

Yet, during his 30 years in the financial advisory business, Welch says there have been a few instances when he's used annuities. The typical case would be someone at or nearing retirement, with no heirs, and who's concerned about outliving assets. Annuitizing part of a pension fund is helpful in this instance by creating guaranteed lifetime income stream, Welch says.

Cooper, meanwhile, uses annuities to reduce the capital-gains tax hit on high-income clients with large amounts of after-tax money invested in stocks and mutual funds. This admittedly only postpones the tax hit, Cooper says, but some clients find it helpful.

"There are academic arguments about whether you should do that," he says. "But what I find is whether it has weight or not, the customer doesn't like paying taxes. It makes them feel better."

Daroff is starting to see variable annuities as a valuable retirement planning tool for risk-averse clients who might avoid equities altogether otherwise. For such clients, he says, variable annuities can be an alternative to fixed-income investments.

He also feels many advisors have out-dated notions about variable annuities and are missing out on lower expense ratios and flexible riders. "I think many advisors hold the view that there is only one kind of life insurance-term-and that all annuities cause cancer," he says. "That is far from reality."