Annuities are very popular with investors in crisis

According to insurance consulting firm Limra, low savings rates and a rotten stock market sent record numbers of savers to lock in current rates with fixed annuities — precisely when rates were near rock-bottom. Fixed annuity sales leaped 74%, to $35.6 billion, the highest ever, for the three months ended March 31.

Fixed annuities, which are covered by state guaranty funds, can offer higher interest rates than bank CDs, says Chris Blunt, vice president in charge of retirement security at New York Life. Thus, a fixed annuity from a top-rated company will guarantee yields of 3.3% to 3.5% for five years before resetting to a new rate, while a five-year bank CD yields an average 2.13%, according to Bankrate.com.

Besides, the Standard & Poor's 500-stock index has lost 23% in the past decade, making guaranteed investments such as CDs and annuities more appealing. According to Dan Beatrice, senior analyst at Limra`s Retirement Research Center, sales of variable annuities, which allow policyholders to move money around in investments similar to mutual funds, have fallen below fixed annuities for the first time since 1995.

Fixed annuities typically charge surrender fees for withdrawals in the first seven to 10 years. (Many also allow a fee-free withdrawal of up to 10% per year.) You'd be better off taking the early withdrawal penalty from a five-year bank CD if interest rates rose, McBride says. However, people who buy annuities are usually elderly, and surrender fees can be a problem if they need to withdraw their money quickly.