Hybrid Annuities | What Are They and How Do They Work?

Looking for growth and security when buying an annuity?

A hybrid annuity could be just the thing.

This product combines a fixed annuity contract and a variable annuity contract in the same annuity product.

Let's dig into the details of these products and see how a hybrid annuity works.

A hybrid annuity is a term for retirement income products that allow long-term investors to split their funds between guaranteed rate and non-guaranteed rate components.

Essentially, buyers choose how the money in their annuity is allocated. They can choose between conservative investments that offer a lower, but guaranteed rate of return and riskier assets that offer the potential for higher returns but also may lose money.

The most popular type of hybrid annuity is known as a "fixed indexed" annuity.

Fixed indexed annuity returns are based on the performance of an investment index, such as the S&P 500. The ability of your annuity to grow follows the overall performance of the market. The good news regarding fixed indexed annuities is that your money is never directly exposed to the stock market.

A fixed indexed product has principal protection which means that if there’s market loss, you won’t lose any of your original principal. The downside is that the upside return is limited as well. Because most fixed indexed annuities also have a fixed bucket with a guaranteed rate that doesn’t follow the index, they can be considered a hybrid annuity.

Generally, you are able to grow money faster in a fixed indexed annuity than you might with most multi-year guaranteed fixed annuities. While the fixed indexed annuity is a stand-alone product, other types of hybrid annuities mix the core benefits of annuities – such as guaranteed lifetime income – and add other features or protections.

Here are a few examples:

• Some variable annuity products allow you to choose underlying mutual funds from which growth (or losses) are driven, but also offer contract owners "loss reduction" riders that can protect your initial investment and income riders that set a minimum guarantee payout once you start taking monthly payments in retirement. A word of caution though, variable annuities come with hefty fees, and principal protection is not guaranteed.
• Some annuities offer long-term care riders that guarantee that a portion of your annuity account will be reserved to pay for long-term care expenses if needed.
• Some single premium immediate annuities (the kind where you hand over a lump-sum payment to the insurance company and they begin making a guaranteed series of payments to you right away), create lifetime income but also have riders that allow access to your initial premium to make withdrawals for emergency purposes.

Who Are They Best For?

People who are interested in having a guaranteed flow of income in retirement, with flexibility in terms of growing their money prior to retirement, may want to look into a hybrid annuity. This is especially true for a stand-alone product like fixed indexed annuities.

If you anticipate having special needs like emergency access to your principal or having money available for long-term care, hybrid riders may be available to you. As you can imagine, the more riders that are available, the more complex (and expensive) the product can become. That's why it is very important to meet with a trusted financial advisor before purchasing any type of hybrid annuity.

Pros

• Flexibility – Hybrid annuities allow you to customize the product to meet our unique needs in retirement. That can include adding long-term care benefits, minimum payout guarantees, and other valuable benefits.
• Risk management – Fixed indexed annuities give you the best of both worlds – upside growth and downside protection

Cons

• Complexity – Hybrid annuities have great bells and whistles, but they can be difficult for the average investor to understand. That's why it's important to bring in a financial professional to discuss your options.
• Cost – The more riders you add to your annuity, the more expensive it can become. These expenses are reflected in lower returns, annual expense charges, or both!

Should You Look Into A Hybrid Annuity?

Remember that hybrid annuities aren’t a type of annuity, they are simply a term used to describe annuities that have both guaranteed and non-guaranteed aspects or features. While hybrid annuities can be complex, they could play a role in your retirement plan, along with other products that make up your "basket" of investments in retirement.

A well-diversified portfolio of investments is important to ensure growth while protecting everything that you've worked for during your working life.

One conservative investment that should consider in your pre-retirement plan is multi-year guarantee (MYGA) annuities. These products guarantee a rate for a specific period, typically three, five, or seven years, and can be a great foundation product as you prepare for retirement.

Canvas Annuity offers some of the best MYGA rates in the country and can be purchased quickly and efficiently online or through a professional contact center. If you’d like a simple, well-performing product as part of your retirement plan, a Canvas annuity may fit the bill!