VanderPal, of Skyline Capital, says index annuities are an appropriate investment. He was co-author of a 2010 study published by the Wharton Financial Institutions Center that found equity index annuity returns were competitive with stock and bond portfolios. Their designs limited downside returns and provided modest returns on the upside.

For example, in the five years that included the stock market meltdown from 1998 to 2003, the average equity index annuity grew at a 5.5% annual rate. By contrast, the S&P 500 registered an annual negative return of -0.4%.

In the up market from 2002 to 2007, the S&P 500 grew at an annual rate of 13.37%. Meanwhile equity index annuities grew at a 6.12% annual rate.

"Index annuities were never designed to exceed the performance of an index, but to provide a return similar to CDs and bonds and protect the downside," he says. "There are a lot of people that lost a tremendous amount of money using asset allocation strategies."

In answer to critics who contend that equity index annuities are illiquid due to surrender charges, VanderPal says the annuity contracts often permit policyholders to withdraw 10% of the account value per year without penalty. Plus, equity index annuities provide full surrender value upon death of the policyholder. Many also offer full surrender value for nursing home and extended hospital stays and long-term illness. Some insurers offer full surrender value for unemployment if the policyholder is less than 65 years old.

If you plan to use index annuities, it's important to analyze product variables such as:

The way the insurance company calculates interest. Whether it is simple interest or compounded interest affects the index annuity's return.

The annuity's interest can be lowered by the cap rate and/or participation rate on the contract.

VanderPal recommends avoiding the "term point-to-point" method of crediting interest. Point-to-point compares the change in the index at two discrete points in time, such as the beginning and end dates of the contract term. If the index declines dramatically on the last day of the term, part or all of the earlier gains can be lost. Surrendering early also can wipe out gains.

The most judicious crediting method is the point-to-point with a monthly or annual reset, VanderPal says. The annual reset compares the change in the index from the beginning of the month to the end of the month or the beginning of the year to the end of the year. So your gain is always locked in. This method works best in volatile and uncertain markets.