The insurance industry is revamping variable annuities into an even worse deal to protect itself from any future market turbulence.
When you buy a variable annuity, you buy an insurance product where you invest in something like mutual funds. If your holdings go down and you die, your heirs receive a payout equal to what you put in. As variable annuities have gotten more complex over the years, it's sometimes possible to redeem the money before dying.
Some people were able to work the system beautifully with last year's market collapse. In fact, certain insurers were forced to seek bailout funds to stay alive when they had to make good on their promise of making investors whole again.
Now the insurance industry is dialing back the benefits and raising the costs on variable annuities to prevent a repeat of what drove them to insolvency, according to
The Wall Street Journal.
Instead of opting for a variable annuity, Clark prefers that people look at plain vanilla index funds.
The annual management fees associated with a variable annuity can be as much as
30 times what you'd pay for an index fund. Moreover, most index funds can be sold relatively quickly with no penalty. Not so with your average variable annuity. Some even have a 10 percent surrender charge for exiting out of your contract before 10 years.
So why do people buy variable annuities at all? Because they are sold as a magician's illusion by a salesperson who tells you that you can't lose -- and nets a monstrous commission in the process. That's why you often hear Clark say that variable annuities are "sold, not bought."
