Choices are proliferating, and investors want guaranteed income.

When it comes to annuities there is good and bad news to report.

The good news is that insurers and annuity companies are creating some of the most flexible and interesting products the industry has ever produced.

The bad news is that the rates and returns companies are paying are at record lows and going lower, as insurers petition state insurance regulators to allow them to decrease the guaranteed floors on their fixed annuity accounts. Many companies have gone so far as to pull their fixed products and even the fixed baskets in their variable products. Alternately, variable annuities in and of themselves can be as much a crap shoot as the stock market, since they provide only a little short-term comfort to investors seeking shelter from the stock market storm. For those entering retirement right now, immediate annuities can be a scary proposition since buying them means locking in at relatively low rates, with no chance of cashing out or transferring money elsewhere when rates rise.

Not surprisingly, none of this has stopped investors or advisors from taking a good, long look at annuities. The reason is simple: Investors moving closer to retirement are determined to guarantee some portion of their retirement income in the midst of what has turned into a very frightening bear market that, in many cases, has taken a big bite out of their retirement accounts.

Fear, pent-up frustration with ongoing stock market losses and the uncertain financial future those losses have created are encouraging all types of investors, including the very wealthy, to seek guarantees for retirement.

That's reflected in a notable uptick in new annuity sales after years of declining net cash flows, says Dan Beatrice, the project manager of the annual annuity sales survey at the Connecticut-based Life Insurance and Marketing Research Association. Overall sales increased 20% in the fourth quarter of 2002, while sales of fixed annuities increased 40% and variable sales increased 7%. Fixed immediate sales increased 39%, in contrast to fixed variable sales, which dropped 19%.

Advisors, even those who had the luxury of viewing annuities as expensive and unnecessary in the long-running bull market, are now taking a hard look at the contracts. They realize that clients in retirement not only want, but have begun to demand, some level of certain retirement income "I think the industry overall is starting to see this as a liability issue and is asking: 'What have I done to insure that my clients don't outlive their money?' says Paula Hogan, president of the fee-only firm of Hogan Financial Management in Milwaukee. "One way to do this is annuitization."

Other planners say they, like clients and even the insurers who have to invest to make annuities payments, find themselves between a rock and hard place because of the markets. "We're in a position now where we're not getting returns from the bond market and not getting them from the stock market, at the same time it's absolutely crucial that we ensure that clients have the income they need," says John W. Ueleke, president of Legacy Wealth Managers in Memphis. "By and large our retired clients are weathering the downturn fairly well because they receive pensions and Social Security. It's the people without pensions who will be at the greatest risk going forward."

That demand is certain to grow as the baby boomers begin their retirement stampede, the majority of them with eroding nest eggs and without determinate pension distributions. It's cast a big light on annuities at the same time it's meant a dose of realism for investors. "We're seeing the same things as advisors are," says Linda Lanam, vice president of annuities at the American Council of Life Insurers in Washington, D.C. "In some cases people are planning to work longer. In other cases, people are choosing to annuitize now, figuring that if rates stay low, they might as well get some income now. Others are delaying hoping rates and the economy will turn around. Still others, though further and fewer between, are bullish on the market so they're buying variable annuities."

What's important, she says, is that insurers, advisors and investors have begun to think not just about asset accumulation, but lifetime income and ways to preserve and direct income in retirement. Annuitization is one of the few ways to do that. "We would never recommend that people put all of their assets in annuities," Lanam says, "but as a piece of the portfolio, annuities can become self-created pensions and serve to establish a floor that allows investors to take calculated risks with the rest of their portfolios."

Interest rates may indeed be at historical lows when it comes to finding pay-out guarantees, but that hasn't stopped the industry from doing full-scale and targeted product development. "There's a greater focus now on what customers need and ways they can customize products to meet their needs," Lanam adds. "I think companies are very cognizant of the fact that if there is too much clutter the message gets lost."

Jerome Golden, president of Golden Retirement Resources, recently launched a new breed of immediate annuity (called the Flexible Benefits Annuity or FBA) that is worth advisors notice. The FBA allows contract holders to customize their annuity by choosing the level of monthly survivor, legacy and supplemental caregiver benefits, if any, they desire. To sidestep some of the fear involved in purchasing an immediate annuity, which after all does not allow for cancellation, the company allows contract holders to dollar cost average into a contract over a number of years. The one-page illustration the company prepares shows what the contract will cost at different benefit levels and also what it will cost if purchased by a single contribution as opposed to multiple annual contributions over the number of years the investor desires.

"We think this is crucial because it helps advisors and their clients overcome a valid question: 'When is the right time to sell my securities and buy an annuity?'" says Golden. "Dollar cost averaging addresses the permanent nature of the immediate annuity contract and the fact that historically it's been hard for investors to commit to the lump-sum payment. We believe this changes the way the market thinks about this product."

It also gives contract holders with underwater securities time for those securities to rebound, an important consideration in this market.

Its payout rates, which are changed on a daily basis for new contracts, were very attractive on April 24 at 4.69%. In fact, for a lump-sum investment of $438,424 (or five years of investing $84,173 annually), the FBA guaranteed a single 65-year-old $3,000 in monthly pre-tax income over his or her lifetime.

For the contract holder who wants to add a 75% lifetime survivor benefit for his or her spouse in addition to the $3,000 monthly payout, the lump-sum contribution goes to $496,048 or $481,357 if one dollar-cost averages over five years. The lump-sum contribution goes to $505,845 for the contract holder who also wants to provide his children or other beneficiaries with a 50% monthly benefit ($1,500) in addition to the 75% monthly survivor or spousal benefit. The cost of the contract increases to $540,835 for those who want to guarantee an additional 50% (another monthly $1,500) caregiver payment should they need to purchase caregiver services.

"I think our product is positioned to capture a portion of the multi-trillion dollar retirement rollover and conversion market in the coming decade," says Golden, who warns advisors not to minimize the investors' desire to lock in some portion of their retirement income. "I saw a classic case of this when we launched in January. The managing partner at a big New York law firm told me he wanted to be our first customer. He said, 'Here's my logic: I want to know how much I'll be able to afford to spend in retirement.' He already had his estate plan and everyone else was taken care of but he wanted to make knowable what his monthly and annual income would be."

That's not to say the industry isn't experiencing it's share of turmoil or that advisors can afford to turn a blind eye to it. GE Life and Annuity Assurance President Pam Schultz told a National Association of Variable Annuities Conference earlier this year that it's been a tough market for two years and "looks like more of the same in 2003." Still, she says, the poor market conditions have served "to underscore the value of the basic annuity proposition, provided the industry raises the bar through innovative products, enhanced sales training and technology."

The company's most closely watched product is called The Retirement Answer, structured as an immediate variable annuity which is invested in a balanced Total Return Fund designed to replicate an institutional pension fund managed by tactical asset allocation. Essentially, it allows an advisor to sit down with a client and help the client purchase his own pension. GE Financial will guarantee a minimum income and may distribute more than that if the total return fund realizes better-than-expected returns.

The push in Congress to offer tax breaks to retirees who annuitize some portion of their retirement plan payouts is also getting favorable attention. Still offering competitive fixed products has gotten more difficult in the current rate environment. In a two-week period earlier this year. Guardian Life Insurance Company of America sold $350 million of a fixed bucket paying 3.15% in its C+C Annuity Variable Annuity before deciding to pull the fixed bucket.

"We couldn't continue it because rates went down again," says Bruce C. Long, executive vice president of New York-based Guardian Insurance & Annuity Co.

With billions in fixed and immediate annuity payout liabilities sitting on insurers' books, there is some justifiable concern regarding individual companies' going concern value and their ability to pay your clients' life-time income. "On the fixed side, it really is a matter of planners doing the same due diligence on companies that they would do for any product," says the ACLI's Lanam.

It's also a matter of making a judgment call regarding interest rates and the fundamentals of the stock market, especially if investors have a longer investment horizon.

In fact, investors are buying annuities earlier and earlier. "Our natural market is five years before retirement to five years after, so the age ranges from 57 to 67," says Golden.

In the end, what to buy and when depends on your fundamental perspective. "If you believe in the markets, this is a buying time," says the Guardian's Long, who maintains he has made no changes in the variable annuities he owns. "I really do think there is wealth to be made in this bear market that will be realized when things get bullish again."

What Do Buyers Think?

A new survey from the American Council of Life Insurance found that of 400 immediate annuity buyers, more than 60% saw it as a good financial decision and 22% saw it as one of the best financial decisions they have ever made. Only 4% saw it as a poor financial decision, according to the survey, which was conducted by Matthew Greenwald and Associates/National Research in December, 2002. As interesting, 58 % of immediate owners say their household owns multiple immediate annuities. Not surprisingly, the biggest motivator for the purchase is regular retirement income (48%). Who do buyers turn to? Insurance agents lead the pack (57%), followed by financial planners (42%) and stockbrokers (41%).