You’ve probably heard the term “hybrid annuity” floating around out there a lot. Let’s take a look at what they are and for which investors they may be suitable.
What is a Hybrid Annuity?
A hybrid annuity is an insurance contract that allows you to deposit annuity funds into both a fixed and a variable component. In contributing to both fixed and variable options, the annuity owner is able to obtain a guaranteed return, while at the same time participating in other types of investments that can offer additional growth of their funds.
Hybrid annuities work in a similar fashion to regular annuities in that the account holder deposits funds into the annuity account either in one lump sum, or by making regular ongoing deposits throughout a certain period of time. As with other types of annuities, while in the account, these funds are able to grow on a tax-deferred basis. But unlike other annuities, most hybrid annuities on the market today will also let investors choose the percentage of assets that go into each of the various underlying investment options. For example, if an annuity holder deposits $1,500 per month into a hybrid annuity, he or she could specify that $1,000 goes to the fixed component and the other $500 goes into the variable side. This also means that the fixed portion of the hybrid annuity would lock in a set amount of annual income, while income that comes from the variable side of the annuity would be dependent upon the performance of the underlying investments that are chosen by the annuity owner.
By combining the key features of both a fixed and a variable annuity, hybrid annuities can yield higher rates of growth than CDs and money market accounts, while still being considered a safe place for retirees and pre-retirees to place their funds.
Who is a Good Candidate for a Hybrid Annuity?
Hybrid annuities can offer their holders the stability of a fixed annuity along with the potential for more growth that a variable annuity brings. Therefore, a hybrid annuity may be a good choice for those who anticipate a longer need for income, while at the same time participating in both the bond and stock markets for additional growth potential.
A hybrid annuity can also help to resolve concerns with regard to other potential needs such as long-term care expenses (more on this later) while still providing their holders with an ongoing retirement income. In addition, the funds that are provided for long-term care costs through a hybrid annuity can be received tax-free.
Hybrid Annuities and Long Term Care
For instance, should a hybrid annuity owner need funds to pay for long-term care expenses, he or she could receive money from their annuity account by way of an accelerated payout. This benefit can essentially alleviate someone from having to purchase separate long-term care insurance coverage, while still having the funds for this potential need covered.
In addition, having a death benefit option on the hybrid annuity will allow the annuity holder to pass on a portion of the annuity’s funds to his or her heirs. For example, the death benefit can be distributed to heirs over a period of several years if the annuity’s income account is larger than its cash account. It is important to note, though, that the amount that is allocated for the death benefit will change the amount of income that the annuitant receives in income.
Additional Hybrid Annuity Riders
Hybrid variable annuities may offer additional living benefit riders as well. These riders can differ in terms of the benefits that are provided. Some of these options include:
- Minimum Income Benefit Rider. This rider will guarantee a minimum amount of future payout – regardless of how the underlying market performs. It is designed so that the annuity holder will have a base amount of lifetime income, no matter what happens with the investments inside of the account. Typically, however, the annuitant must hold the annuity for at least several years before being allowed to exercise this particular rider.
- Minimum Accumulation Benefit Rider. This rider ensures that the holder of the annuity will keep the value of his or her annuity deposits — plus an additional minimum amount of growth — regardless of underlying market performance. This means that after a certain number of years, the annuity’s income account will be equal to at least a certain minimum percentage of the amount that the annuity holder deposited.
- Guaranteed Minimum Withdrawal Benefit. This rider guarantees the return of the annuity holder’s deposited amount via a series of fixed withdrawals, meaning that the withdrawals will be guaranteed until all of the principal has been returned, no matter what happens in terms of performance in the underlying market.
- Guaranteed Lifetime Withdrawal Benefit. This rider guarantees that a certain percentage of the annuity’s account value can be withdrawn each year for as long as the annuity holder and their spouse lives. The percentage will vary, and it is dependent on the age of the annuitant when he or she starts to take their withdrawals.
Key Benefits of Hybrid Annuities
In addition to simply providing retirement income, hybrid annuities can also provide for many additional benefits, such as:
- Market potential for additional growth
- More control over the annuity assets
- Less downside risk than a variable annuity alone
- No requirement for constant portfolio management
- A hedge against inflation
- Available funds for other needs such as long-term care
- Ability to leave the remaining annuity assets to heirs
Hybrid annuities can also be a nice alternative for investors who are seeking to defer income for several years and then turn their annuity funds into income, knowing exactly what their income base will be in the future. Given the hybrid annuity’s ability to meet the need for both growth and income in one single package can make this financial vehicle an attractive option.
Written by Susan Wright