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Annuities have traditionally been the Rodney Dangerfield of investment products. They get no respect from most of the financial media. Articles in Forbes and similar publications continually harp on the typically high fees charged on these products. Brokerage firms have been sued by clients in situations where brokers have sold annuities (for their tax shelter advantage) into investment vehicles that already enjoyed a tax shelter -- like IRA accounts. The average annuity product nationally charges an annual fee of slightly over 2.5 percent.

So, what's good about them? In some iterations, they can accomplish some value-added advantages over just investing in a collection of name-brand mutual funds. An annuity, basically, is the reverse of life insurance. It is insurance that pays you if you live too long rather than if you die too soon. A 65-year-old buying an annuity for $100,000 is buying the promise that they will receive $7,000 a year for the rest of their life. If they live to 105, it's a heck of a deal. If they get hit by a bus leaving their insurance agent's office, the $100,000 is gone.

The insurance industry leaves no stone unturned when it comes to generating legislation favoring its products. Because annuities are insurance products, the compound earnings in the underlying investments accumulate on a tax-deferred basis, like money in an IRA.

Many people buy an annuity and let earnings compound during what's known as the accumulation phase. This is the period between when the annuity is initially purchased and when the benefit (the income phase) is scheduled to begin. Many people invest in annuities just for this benefit with no intention of ever "annuitizing" or agreeing to part with the lump sum in exchange for a lifetime income. They just want the tax-deferred build-up.

Then they'll take the money out slowly over time (paying taxes on the earnings portion) while the balance continues to grow tax-free. No law says you have to "annuitize" and risk getting hit by the bus.

For someone who thought he had seen it all, I learn that Vanguard, through its insurance affiliate, is now offering an annuity that offers the tax-deferred buildup, but something new and different happens when you reach the point at which you might otherwise have "annuitized."

Instead, Vanguard guarantees a percentage of income for the rest of your life, but you don't give up the principal. That can go to your heirs instead of the insurance company. The lifetime income for someone electing it between ages 65 and 69 is 5 percent of whatever the account balance is at that time. Waiting until 70 increases the income to 5.5 percent. Adding a spouse to the list of who gets the lifetime income reduces the payout by a half a percent.

The so-called withdrawal base is the amount of money deposited at the start. Five percent of this amount becomes the annual payment for life. A $100,000 deposit triggers at least a $5,000 annual income for the rest of the investor's life.

But it can get even better. The money invested in, say, a balanced fund might increase in value over 10 years to as much as $120,000 even after the payout and the fund expenses. Or, it could drop to $50,000 (picture a $100,000 deposit in 2007 and checking its value in March 2009, for example). The payout in the latter case continues at $5,000 regardless of what hits the account balance might have taken.

On the upside, if the underlying balance continues to grow after paying the 5 percent income plus fees outlined below, then this new balance becomes the new withdrawal base each year. In 10 years, in the example above, the withdrawal base could have increased to $120,000. Your guaranteed income for life would then be $6,000. It resets each year with a ratchet effect that prevents it from ever being reduced.

This strikes me as being a good deal. The annual cost for mortality and administration and the income guarantee -- plus what the underlying mutual funds charge -- averages about 1.5 percent. This, plus the 5 percent payout, means that if the underlying fund earns more than 6.5 percent per year, your account balance (yours if you decide to quit or for your heirs if you die) will be increasing in value.

If, in a doomsday scenario, the underlying balance dropped to zero, Vanguard guarantees to pay annual income of 5 percent of your highest-achieved withdrawal base as long as you live. It's like heads you win; tails they lose. That doesn't happen often in this business.

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