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A REPORT in last week's New York Times pointed out that AIG was once again the top-selling provider of fixed-rate annuity products by banks. Backed by the government, AIG now has an unfair advantage over its competitors like New York Life and can generate "teaser rates" that bring in new money.

Banks sell these products to disgruntled customers who are upset at the historically low rates paid on certificates of deposit. Right now, AIG annuities will pay a teaser rate of 5 percent for one year, but longer-term rates are presently at 2.6 percent.

The question is whether or not annuities make sense for anyone compared to the alternatives. The main point of an annuity is to generate a lump sum of money that can be converted into a stream of income when someone retires and wants to be assured that they will never run out of money.

For someone living to 105, it's a great deal. On the other hand, if you get hit by a bus on the way home after buying the contract, you never get a dime and all the money stays with the insurance company. There are variations on this theme, but those are the fundamentals.

I could never understand why anyone would buy an annuity when a combination of bond funds and a little education does such a much better job. A $100,000 lump sum into a fixed-income annuity purchased at age 65 generates about $7,000 per year as long as the buyer lives. "Wow. A 7 percent return," you say but hold on a minute.

A combination of bond funds will come close to generating the same 7 percent, but with the huge advantage of allowing the buyer to control the money. The combination of a short-term corporate bond fund, a GNMA fund, and a high yield corporate fund, in equal portions, would have generated a combined interest payment of about 6 percent like clockwork over the past 10 years. The capital value of the short-term and high-yield funds took hits in the recent implosion, but the interest payments never stopped coming, nor were they even reduced to any extent.

Anyone who purchased this fund combination from a company like Vanguard over the past 10 years has been rewarded with a steady stream of income automatically deposited into their checking accounts. True, the collapse of the financial markets caused most bond funds to drop in value because the possibility of default reduced the values of the underlying bonds that the funds owned. The exception, of course, was the GNMA fund, because that fund invested only in government guaranteed mortgages.

Now that the markets have corrected themselves, the underlying bond values have returned to their pre-crash levels. This explains why the total year-to-date return on, say, the short term corporate fund is about 13 percent. Of that return, about 4 percent was interest paid and the remaining 9 percent was a "snapback" of the previous capital reduction. That was a fund with bonds that were only a few years longer in maturity that those of a money-market fund.

The High-Yield Corporate fund was a little more disturbing. It lost almost 30 percent in capital value at the lowest point of the financial markets' implosion, but it snapback, plus a 7.5 percent yield, has now generated a 35 percent year-to-date return. Finally, the GNMA fund didn't lose anything because those mortgages all had the direct guarantee of the federal government. This explains why its year-to-date return is just 5.5 percent, basically the rate that people are paying on mortgages. No fuel for a snap-back.

For those who need income and are otherwise tempted by a bank salesman's annuity pitch, this combination of bond funds pays a comparable return and offers investors control of the capital right to bitter end. The so-called "hand out of the grave" could release a fist full of money. And who deserves that cash the most? Your kids? Your favorite charity? Or an insurance company like the one that brought the world financial market to its knees.

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