A ‘hybrid annuity’ or ‘hybrid income annuity’ is simply a marketing term applied to a single annuity contract that combines multiple types of benefits into one contract. By combining the best elements of other annuities together, we have a new set of benefits that were unavailable in the market just a few years ago.
If you’ve researched annuities online, most likely you have heard the term “Hybrid Income Plan” or “Hybrid Income Annuity” bantered about as a one-stop solution to retirement planning, and portrayed in the proper noun sense as if it was a product class of its own. We’re glad you found us while looking for a straight answer, because it can be quite difficult for you to find a hard and fast definitions.
Now before making sweeping generalizations about hybrid annuities being ‘good’ or ‘bad’, take a minute to truly understand what these innovative annuities can do for you. Only then would it be appropriate to say if it’s right for you or not.
Annuities with lifetime income options certainly have a lot of great features, but many sales people either do not fully understand them, or worse, are pushing you into low credit quality carriers that don’t deserve your business.
Just What Is A Hybrid Annuity?
Generally speaking, most annuities that are referred to as ‘hybrid annuities’ will combine the benefits of a fixed index annuity (potential for gain without risk of loss) with an immediate or deferred lifetime income payout rider. Some contracts may often times add an additional life insurance component.
Occasionally, some agents and advisors will refer to variable annuities with lifetime income riders as ‘hybrid annuities’ also, however as variable annuities leave you exposed to the potential for loss, we do not consider them viable ‘safe money’ alternatives.
When used in conjunction with fixed index annuities, the term ‘hybrid annuity’ therefore is used simply to imply a combination of benefits, namely:
Potential Appreciation – This product type combines the safety of a fixed annuity with potential for market based growth linked to an exterior market index.
Your Account Value can go up, subject to your contract’s terms, but it WILL NOT LOSE MONEY.
Once interest has been credited to the account it cannot be reduced due to negative market performance, which makes this a great retirement income option, as a combination of the features of both a safe, fixed annuity and a lifetime income, immediate annuity.
Death Benefit– Many hybrid fixed index annuity contracts add a supplemental death benefit in addition to other provisions. Often times, consumers choose to guarantee that a certain level of the initial investment is guaranteed to heirs if death occurs during the surrender period. There a many ways this can be structured and it is a valuable life insurance component added on to all the other benefits of the policy.
Lifetime Income Rider- The most common reason people chose to go with a ‘hybrid annuity’ is for the lifetime income option. For a nominal fee- generally 1% or less- you can ensure a guaranteed, lifetime income with this type of contract. You income account (The base from which your income is calculated) will grow with every year of deferral, and once you start taking income, it can last for life.
Guaranteed Income Riders – Contract Options That Make Simple Index Annuities Into Hybrids:
Quite prevalent on fixed index and variable annuities, guaranteed income riders (often referred to as GLWB or GMIB riders) add the stability and longevity benefits of immediate annuities to a deferred growth contract. In their basic form, fixed index and variable annuities offer asset growth over time- at a fixed rate in the case of a fixed annuity, and at a market driven rate for index annuities.
However, a GMIB type income riders add additional features that are meant to ensure there is a guaranteed lifetime income benefit amount, regardless of account performance over the term of the contract.
Beware however that account value growth and income benefit growth are not the same! This is the single biggest misconception in the annuity marketplace, and is often glossed over. A thorough analysis is in The Index Annuity Guide and Video Series, free for our members in the signup box at the bottom of the page.
Additional Hybrid Annuity Benefits:
In a Hybrid Annuity, your money is invested conservatively, and earnings are re-invested by the issuing insurance company in options that credit you a portion of the gains in a market index, such as the S+P 500 or the Dow Jones. Gains from these options can increase your account value, but losses in the market do NOT affect your account.
You have no volatility and no risk of loss to your money in an index annuity.
Hybrid annuities also offer lifetime payout options, without ‘annuitizing’ your assets and forfeiting your money.
To calculate the lifetime income amount, the insurance company grows an ‘income account’ every year that you leave your money invested. The longer you leave your money invested, the larger this income account grows.
When you decide to start taking income, the company uses a ‘payout rate’ to calculate your lifetime income.
How Income Is Calculated: An Example Scenario
For example, if you started with $100,000, and your income account rolled up at 7% per year for 10 years, your income base would have grown from 100,000 to roughly 200,000 in that time.
The payout rate depends on your age when you start income, but let’s assume it’s a 6% payout. Rollup Rates and Payout Rates vary with each carrier.
When you decide to start the lifetime income, you receive 6% of the 200,000, or $12,000 per year, for life. Of course, this income can be a joint payout too for you and a spouse.
Even if your actual account value drops to $0, the lifetime income continues.
One of the many other benefits is that if you die after only a few years of income, your heirs will get whatever is in your account value. This is a huge advantage over other kinds of annuities.
A few other perks of these contracts include:
- Provisions to increase your income if you have a Long Term Care or disability issue,
- Enhanced death benefits for your heirs,
- Free withdrawals of a portion of your money each year for liquidity needs.
- Some contracts also offer a signup ‘Bonus’ credit to your Income Account when you open a new account.
A Word About Fees
One of the best aspects of hybrid index annuity contracts is that they come with very low fees.
The lifetime income rider is typically just 1% of the account per year. And while there are no other fees, you may be subject to surrender schedules just as you would have with most annuities and CD’s.
Overall, the low fees are a major advantage over expensive Variable Annuities.
Hybrid Annuity Summary:
In sum, Hybrid Annuities offer potential appreciation, no risk of loss, lifetime income, and come with liquidity options and long term care benefits.
Hybrid annuities are a great option for investors seeking safety, security, income, and flexibility in retirement, all in one contract.
We save the most comprehensive information for The Index Annuity Guide and Video Series, which is free for subscribers. Sign up today and dig into the details so you can determine exactly which type of annuity best suits you. For direct help from an annuity expert, don’t hesitate to call or email with specific questions.