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By Zeke Faux and Margaret Collins, BusinessWeek,

When Helen Siswein, a retired teacher, heard about an investment that might earn as much as 8 percent a year and never lose money, she was sold. “I thought, ‘Boy, if the market surges, I could make a lot,'” says Siswein, 82. In the summer of 2003, she put about $1 million into four annuities linked to stock market indexes on the advice of an insurance agent who visited the widow at her former home in Bucks County, Pa.

Siswein says the agent didn’t tell her she would be locking up most of her money until her 87th birthday. Or that there were caps on how much the investments could earn. Siswein was charged fees as high as 15 percent of her account balances to cash out early, in 2008, the contracts show. She says one annuity earned an average of about 3 percent a year after the penalties. The index it tracked, the Standard & Poor’s 500-stock index, returned 6.3 percent including dividends in the same period.

Equity-indexed annuities have been around since 1995, and their popularity has spiked in the wake of the market rout of 2008. Insurers led by Allianz Life (AZ.) and Aviva sold a record $32.1 billion of indexed annuities last year, up 7 percent from 2009, according to trade group Limra, in Windsor, Conn.

The contracts, which earn money based on the performance of stock indexes, don’t decline in value if held to maturity, which appeals to conservative investors. Their terms are complex, however, and often include caps on returns that insurers can change at will, as well as lockup periods that can stretch to 16 years. Then there are the embedded fees, which do not have to be disclosed as they must with mutual funds. Salespeople, who earn commissions as high as 12 percent, typically downplay such factors when pitching the annuities. Barbara Roper, director of investor protection for the Consumer Federation of America, a lobbying group based in Washington, D.C., calls them “one of the most abusively sold products on the market today.”

Eric Thomes, senior vice-president of sales at Allianz Life Insurance Company of North America in Minneapolis, the largest seller of indexed annuities in the U.S., acknowledges there’s a trade-off for investors. “You will never get all of the upside” of the stock market because returns are capped, he says. “You also don’t need to worry about the downside, and with what happened in 2008, this type of benefit will no doubt interest a lot of people.” Allianz Life is the target of a class action in which investors allege that the firm misled them into buying indexed annuities. Siswein, who bought an annuity from Allianz, joined the suit after she closed her accounts. Allianz Life denies the allegations of the case, company spokeswoman Laurie Bauer said in an e-mail. Bauer said she could not comment on Siswein’s contract because Siswein wouldn’t sign a release.

MetLife (NYSE:MET – News) and Prudential (NYSE:PRU – News), the two largest insurers in the U.S., don’t offer indexed annuities but do permit agents to sell contracts issued by third parties. TIAA-CREF, the retirement company that manages more than $400 billion, doesn’t offer them. “Very few people understand what the product is,” says Dan Keady, the company’s director of financial planning.

Unlike the stocks they track, indexed annuities generally aren’t subject to securities laws and are regulated by state insurance departments. An amendment introduced by Senator Tom Harkin (D-Iowa) to the Dodd-Frank financial overhaul law passed by Congress in July blocked the U.S. Securities and Exchange Commission from regulating the market. State insurance regulations aren’t strict enough to prevent salespeople from taking advantage of the elderly with indexed annuities, says Roper of the Consumer Federation. Jim Mumford, first deputy commissioner for Iowa’s insurance division, maintains that oversight of the industry is adequate. In Iowa, which is home to several insurance firms, agents have to gather information from buyers such as their income and age to ensure the product is suitable for them.

Not all buyers of indexed annuities have soured on them. Ron Smythe, a former chief executive officer of Meineke Car Care Centers who’s now retired and living in Longboat Key, Fla., says he started moving money into indexed annuities about a year ago. Smythe, 76, bought a contract from Allianz Life because of the principal protection and potential for higher yields than other annuities. He says he’s unconcerned about the early withdrawal penalties because he’s holding them “for the long range.”

The bottom line: Some investors are buying annuities whose performance is linked to stock market indexes. Many do not grasp their complexity.