Time horizon and the amount you have to invest are key. If you have less than $100,000 to invest then a muni bond fund would be better than individual bonds. Like Joe, I am not a big fan of the muni bond funds - there is lack of control over when you take a loss or gain, and you can lose money on them (unlike a CD). If you can do individual bonds then you might consider laddering the maturity. Also, to make the bonds tax free in your home state you should try to stick with bonds issued from your state's municipalities (while staying clear of private activity bonds if you need to avoid AMT add backs as another poster astutely mentioned).
As far as the problem with the insurers of muni debt - some issues really don't need the guarantee of the insurers, but you need a savvy bond person to know the issues.
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