Stock market jitters are boon for annuities But high fees mean that upside potential in such contracts is fairly limited, expert says.t

U.S. insurers' sales of variable annuities jumped 24 percent in the first quarter, led by policies that promise lifetime income and protect against market declines, at a time when investors are still wary of stocks.

The retirement products' growth is driven in part by concerns that another stock market drop like the one in 2008 could wipe out savings, said Moshe Milevsky, finance professor at the Schulich School of Business at York University in Toronto. Consumers "fear that the S&P at 1,300 is a mirage and it's going to go back to 700 for the rest of our lives," he said.

Annuities are insurance contracts that offer a steady stream of income. With variable annuities, customers can choose their investments such as stock and bond funds and the account value will fluctuate with the market.

For MetLife Inc. and Prudential Financial Inc., the top two U.S. life insurers, the hottest product this year also offers a guarantee of income for life, even if a customer's account balance falls because of market declines. There's an annual fee for the rider, which averages about 1.03 percent, according to Morningstar Inc., on top of the regular annuity fees, which average about 2.51 percent.

The high fees mean that "the upside potential" in these contracts is "fairly limited," said Kenneth Masters, director of life insurance design and development for Pinnacle Financial Group in Southborough, Mass. "Would I have been better off saving 370 basis points and being fully in the stock market?"

Sales of variable annuities in the U.S. climbed to $39.8 billion in the first quarter, from $32.2 billion a year earlier, according to trade group Limra. Investors have withdrawn $50 billion from U.S. stock mutual funds in the 12 months through April, according to Chicago-based Morningstar, a research firm.

Individuals shouldn't put all of their assets in one of these products because "there are always unforeseen expenses," said Masters. "Usually they do carry some severe penalties if you exceed your guarantee in terms of taking money out."

Penalties may include surrender charges as high as 9 percent of the account balance for cashing out, according to Morningstar. And taking out more money than is allowed in the terms of the rider may reduce the future guaranteed income, said Timothy Pfeifer, a consulting actuary and president of Pfeifer Advisory LLC in Libertyville, Ill.

The usual withdrawal rate on contracts with a rider is 4 percent or 5 percent a year at age 65, according to Ernst & Young.

That percentage generally increases if customers wait to start taking out money. Some contracts allow withdrawals of 7 percent at age 85, data from the New York-based firm shows.

The New York State Insurance Department said in February it will require insurers to disclose how withdrawals in excess of those set percentages affect future payments.