In an economic world gone mad, a lot of people start soul-searching and revisiting their dearest held money convictions. Even financial advisors, many of whom are starting to second guess such sacrosanct concepts. If you had $100,000 in one of the big indexes in October 2007, chances are it was down to $60,000 or even $50,000 a year later. Almost everything lost money: stocks, bonds, commodities, real estate, international investments, etc. For many, there was nowhere to hide except Treasurys.

And so people are posed with this question: Would you have paid a little bit more for a safety net that would have protected all your money? Most people's answer to that would be an unabashed, "Yes." But then if you invoke the phrase "variable annuity," the enthusiasm of some people immediately starts to curdle.

Some are thinking 2009 could be a watershed year for variable annuities, because the new breed of them-those with the latest guaranteed withdrawal and principal benefits-have not been tested in a sour market. Maybe the product, if sold correctly, could offer investors the peace of mind they need to move back to the equities space after a year when many people want to simply put their heads in the sand.

"You can't put your money in the mattress or a coffee can in the backyard," says Catherine Weatherford, president and CEO of NAVA Inc., the Association for Insured Retirement Solutions. "People are looking for ways to get their toes back into the water."

Still, in some circles it's seen as dicey to promote these products, for an oft-read litany of reasons: They're too pricey, for one thing, and draw water from your growing asset garden with steep fees of 2% to 3% depending on what benefits you tack on, much of that for the cost of the insurance. For the privilege of paying these fees, you get to fatten the wallet of the advisor or agent who sold it to you. Meanwhile, some contracts are often written in such a way that you can't touch the fruit for many years without paying a hefty surrender charge. The product's enemies among regulators may also invite unwanted scrutiny, even if the products' features appeal to many clients.

These stigmas are enough that many advisors, especially in the fee-only space, still don't like them, and even those who do concede that they are usually oversold or sold to the people who don't need them.

The product's advocates, however, say that they are misunderstood, and that the new breed of variable annuities with the income and principal guarantees are tailor-made for years like 2008, when your nest egg can be wiped out in a matter of months. Sure, clients' return might not have been totally destroyed if they were in a conservatively managed balanced fund. But how much of that do you have to draw off of after September 2008?

After all, some people are willing to pay the fee because they want that insurance. They can't afford to lose the money because they are actually going to use it. Thinking about accumulation and thinking about distribution are two different things, and if your assets are wiped out at the wrong time, all that extra effort you spent chasing the best performance seems like a silly, Pyrrhic victory.

And sometimes you can't bet on the market performance to sustain you even for 10 years. After all, when the last few years of the tech boom-1998, 1999 and 2000-fall off the scale, the S&P 500's 10-year annualized return could remain negative for the next three to five years, say advisors. And meanwhile you're eating into principal if you're taking all of this out of your mutual fund.

"You know there's a difference between being prudent about fees and cheap, and I think some people tend to look at the fees and they run. I think they have to weigh that out in the big picture," says Chris Chiarella of Siamo Investment Advisors in Carlsbad, Calif.
"If someone bought a home and didn't have home owner's insurance and calculated the rate of return on that investment, it's going to be a more attractive return," says Mark Cortazzo of Macro Consulting Group in Parsippany, N.J., who runs a hybrid fee and commission practice. "But I don't think there is a financial advisor in the U.S. who would say, 'Don't have homeowner's insurance.'"

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."

More important, say variable annuity proponents, these products can ease investors back into the market at a time when they might be too timid to go back in-and really miss the returns. After all, the amount they could miss by staying out-or by timing the market badly-is going to be worse than a 2% to 3% management fee.