WITH A SUCCESSFUL consulting business and a lifetime of savings under his belt, Russell Schellenberger had always thought he'd be able to retire on his terms. Then the tech bubble popped, and the terrorist attacks of 9/11 prolonged the economic downturn. As he inched closer to his 60th birthday, Schellenberger started to worry. "It turned out world events could ruin you," he says. All he wanted was a little assurance for the future assurance that he and his wife, Marilyn, would be financially secure.

In time he got all that and more, from a financial tool that many investors had grown wary of: a variable annuity. According to the Schellenbergers' financial adviser, a new version of this old standby would let them have it all: investment gains with zero risk, plus a steady paycheck for as long they wanted one. The Cleveland-area couple was sold, handing over nearly $1 million to the insurance company Lincoln National. Schellenberger, an accountant, admits he doesn't fully understand how the company can make those promises. Still, he's glad they do. "We're protected," he says. "If something happens tomorrow, we're okay going forward."

In the world of retirement planning, the "A" word once something of a scarlet letter is making quite a comeback. Just a few years ago, variable annuities were shunned by financial advisers and clobbered in the press, criticized as expensive at best and scams at worst. But today anxious baby boomers are embracing a newer version that makes some impressive promises. In 10 years sales of variable annuities have more than doubled, approaching $200 billion for the first time in 2007 that's something like $750 million in savings being moved into these products every working day. And banks and brokerage houses have tripped over themselves to offer different varieties of this breed: There are now more than 1,100 different annuities on the market, up from 295 a decade ago, according to the financial-services research firm Financial Research Corp.

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To some degree the rocky economy has only spurred this Lazarus-like revival, by weakening many of the financial pillars retirees have relied on. Companies are abandoning pensions at an ever-faster rate, for example, while investment returns in 401(k) plans are flatlining. But variable annuities are also hot because the industry has loosened some of the old restrictions on its alluring income-for-life promise. The new pitch: The payments keep coming no matter what happens to the market, and investors can get their savings back. It's an almost irresistible offer custom-tailored to calm the jangled nerves of this anxious and affluent demographic. And to make it even more soothing, the word "annuity" usually isn't mentioned Schellenberger didn't even know he'd bought one.

But as attractive as these investments have become, consumer advocates say few buyers understand how the plans work, what they cost and how that might affect the value of those alluring paychecks. (The fees on a million-dollar policy can be more than $35,000 a year.) What's more, even industry insiders worry that some companies won't be able to keep the money flowing down the road. Indeed, in an age of figure-it-out-later financing that helped contribute to the subprime debacle, many annuities rest on a foundation of untested assumptions. Skeptics wonder: Are these annuities a rock-solid promise or a leap of faith?

AFTER 20 YEARS as a certified financial planner, says Denver-area adviser Mark Arlen, "I can handle anybody." Together Arlen's 500 or so clients are worth about $140 million, and at root most them have the same concerns. If not in retirement already, they're close to it, and these days they're particularly skittish about the markets. Back when the tech bubble burst, Arlen had to work 12-hour days reassuring clients, trying to persuade them not to bail out of the market. That's one reason he likes the new annuities: Thanks to the payment guarantee, he figures he won't have to do as much hand-holding.

Arlen can explain a variable annuity to a client in about five minutes. He starts with the general idea, emphasizing the guaranteed income. Then he reaches for a set of hypothetical performance charts provided by the insurance company. The math behind the charts is hard to follow, but Arlen points out the important part: In 2001 and 2002, when investors overall lost money, the payments from these policies would not have dropped. (In fact, this particular guaranteed-payment option didn't exist then, but this point gets glossed over.) Arlen makes sure to talk about longevity, which he sees as the greatest risk his clients face. "You've got plenty of money if you die tomorrow," he'll say. "If you live a long time, though, we've got problems." If he hasn't already mentioned the tech crash, he'll invoke it here, and if his clients weren't worried about protection before, they are now.

Pitches like that make the annuities relatively easy to sell, especially since clients generally trust their advisers. Arlen says it took "about two years to fully understand" these new guaranteed-payment features, which he first started selling in 2003. Indeed, they're complicated but also potentially enticing. Give an insurance company, say, $100,000 for one of these annuities and it'll typically invest the money for you in your choice of a handful of mutual funds. Even if the investments go south, you'll get a minimum payment every month down the road. (If the investments take off, the payments could grow higher.) And unlike with older variable annuities, investors don't give up control of their assets once they start taking income payments. They can cash out of the account or pass it on to heirs when they die.

There's only one problem: Nobody in the industry knows where the money will come from if those investments don't pan out. Consumers already have $1.5 trillion invested with the industry, and analysts say the bigger that figure gets, the riskier it may become. Traditionally, insurance works by gathering a large group together, so risk is spread around. We're not all likely to get into a car accident on the same day, for example, so an insurance company can use the premiums of those who don't crash to cover the expenses of those who do. The new annuities, however, "are the complete opposite," says Dave Bulin, head of equity risk management for Lincoln National. If the market goes down, he says, it's going down for all the variable-annuity holders at the same time.

To manage that liability, companies have to predict what they might owe in benefits at any given moment, depending on what the markets do and when policyholders might start withdrawing their money. "On a scale of difficulty, from one to 10, this is 9.95," says Noel Abkemeier, an actuary at consulting group Milliman. Ultimately, the companies end up making a series of assumptions, backing up their guarantees with a combination of reserves, derivatives and reinsurance. Trouble is, no one really knows how markets or customers will behave. The products have a limited track record, and since they've been available, the market hasn't seen anything like the crash of 1987 or the tech bubble.

That's one reason some experts fear that the sales boom could come back to bite the industry. "I can't stand here and say the insurance industry will be fine," says York University finance professor Moshe Milevsky, who has studied annuities for decades. He says he likes the new products, but he believes that even with their high fees, they're underpriced to cover the cost of protecting investors in a crash: "These companies are going to have to think more carefully about risk." Credit agencies that rate insurance companies' financial soundness are worried too. Three years ago credit analysts at Moody's raised red flags, writing that "many companies have not done an effective job of quantifying risk" in "plausible" worst-case scenarios. Today, says Moody's analyst Scott Robinson, "we still have the same concerns."

It's not part of anyone's sales pitch, but annuities can fail. In the late 1990s the august U.K. Equitable the fourth-largest insurer in Britain at the time couldn't afford to keep up its annuity payments because interest rates didn't do what actuaries had expected. Then the markets tanked, and faced with spiraling losses, Equitable cut payments to 50,000 policyholders by 30 percent a harsh blow to retirees who were counting on the income. After lengthy litigation and arbitration, many policyholders settled with the company, but they still saw their payments reduced. Equitable says that, technically, it met all its obligations, and aggrieved policyholders might not have understood the fine print. (Even so, "we're not looking to defend what happened," says a company spokesperson.) Peter Scawen, 68, a former policyholder who founded an advocacy group during the crisis, says that Britons trusted Equitable's blue-chip reputation only to suffer when the financial model fell apart. Describe the lifetime income guarantee attached to American annuities these days and Scawen's judgment is swift: "I wouldn't touch it," he says.

Back here in the States, insurers are quick to point out that no American company has ever defaulted on an annuity payment. But conversations with insurance executives reveal that many of them think such a collapse probably will happen just not to them. At Hartford Life, Chief Financial Officer Glenn Lammey points out the new annuities simply don't have a long enough track record for the companies to know what to expect. "We make assumptions and that's the risk to us," he says. "There's a risk to the companies that write the stuff." (Other companies, including MetLife, Prudential and AXA, declined to discuss their risk-assessment techniques.) Eric Henderson, senior vice president at Nationwide, says his company is currently in good shape to absorb any losses that might come from its variable-annuity business. But he admits that prospects might get shakier if the business grows much faster. "If we sell twice as many, we're probably okay," he says. "If we sell three to four times as many, I start getting worried."

Already, some insurers have started to raise prices to help cover the risk, which is bad news even for current annuity owners (higher fees make it much less likely that the value of those golden-year payments will keep up with inflation). Still, the advisers who sell annuities don't think that will hurt the business. After all, fear of losing money is a force that can change the way investors do their math. "I don't think most people need these products," says Kelly Bills, a Salt Lake City adviser, who nonetheless sold $20 million in annuities last year alone. "But if it helps them stay in the markets, then it's worth it."

Your Results May Vary

Insurers and other financial-services companies have had a field day marketing variable annuities lately sales have more than doubled in the past 10 years. Here are some facts to keep in mind before wading through the paperwork. What "variable" means Think of a variable annuity as the mutant offspring of a mutual fund and an insurance policy. The investor's savings go into an investment portfolio, which can rise or fall with the market. There's also a "death benefit" that gets paid to heirs after the investor dies. The new wrinkle With most annuities you can decide at any time to convert your assets into a regular payment but once you make that move, called "annuitizing," you can never access the savings again. Newer variable annuities break this mold, with a feature that's usually called a "lifetime withdrawal benefit." Investors can opt to take the paycheck, but they can also keep some control over their money and withdraw it if they need to. Hitting reset How much money an annuity investor withdraws is pegged to the value of the lump sum you invest. If that investment grows, you can reset the annuity payment getting a bigger check. A key perk: Even if the investments sink to zero, the payment won't shrink. Paying the piper None of this comes cheap. When you add up all the fees for the insurance coverage, for the withdrawal and other benefits, and for the underlying investments, the cost of a variable annuity can total more than 3.5 percent per year or $3,500 per $100,000 invested. (A diversified mutual fund portfolio, by contrast, might cost only 1 percent.) The higher the fees, the less likely it is that the investments will grow. And watch out for so-called surrender charges as high as 7 percent if you withdraw your money too soon. A cheaper way In the case of almost all annuities, there is a less expensive way to go. Most banks and brokerages can set up a systematic withdrawal plan to convert savings into a steady stream of payments. Stick with mutual funds that have relatively lowexpenses, and you'll be looking at fees of $1,000 or less per $100,000 invested, cutting your costs by two-thirds.

Also See:

• Who Should Buy Variable Annuities?

• Annuities in Your 401(k)?

• Last-Minute Retirement Planning