"By all rights, variable annuities should be dead by now" writes Liz Pulliam Weston, personal finance columnist for MSN Money and author of the syndicated column "Money Talk." Strong words about a an extremely popular and enduring investment alternative. In fact, Ms. Weston notes, annuities are selling better now than ever before—despite the fact that tax treatment is unfavorable and returns unimpressive. (Read Ms. Weston's entire article on MSN Money's website).

Fee-only financial adviser Frank Armstrong, whose company is headquartered in Miami, Florida, says it even more plainly, and expands the condemnation to all types of annuities. Mr. Armstrong insists that "most [annuity purchasers] probably made a bad decision." (More on the subject from Mr. Armstrong at Understanding Annuities).

What’s so wrong with annuities that these advisers get so exercised? There are several concerns:

  --Surrender charges. Most annuities "cost" nothing at the investment end, but typically have a "back end load" of as much as 10%. These costs are usually fully disclosed, but not emphasized, and they mean that the annuity is not a suitable choice for anyone who might need their investment liquidated in the next few years. That includes the elderly, who just might need access to their money for expensive care before the back end load period ends.

  --Tax treatment. Although the annuity might provide tax deferral, the income it ultimately yields will probably be regular income. A mutual fund with the same yield will be taxed at a much lower rate, because its income will mostly be capital gains. If you die owning the mutual fund, your heirs may avoid capital gains taxes altogether—but not the annuity’s income taxes. This is particularly ironic since the main selling point for annuities is often an allegedly favorable tax treatment.

  --Death benefits. Again, what is billed as a benefit is probably a disadvantage in most cases. Life insurance is not free, and so the benefit costs something. But if you hold the annuity for ten years it is unlikely to lose value—and that is what the death benefit protects against. The result: expensive protection against a small risk.

If annuities are such poor investments, why are they so popular? Most critics, including Ms. Weston and Mr. Armstrong, point to one of the most common characteristics of annuities: they pay uncommonly high commissions to salespersons. How much of a commission? From 2% of the original sales price to a common rate of 4%, with some commissions as high as 5 or 5.5%—and as much as 14% reported in a few cases. That is why, as one analyst has it, "annuity sales have skyrocketed." That high commission rate is also why annuities have a back end load—the insurance company needs several years to recover the cost of getting someone to sell you your annuity in the first place.

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