More than likely, you’ve heard the term “hybrid annuity” float around in conversations, or you’ve even discussed it yourself. The term “hybrid” is used indiscriminately to describe a variety of products, VAs or fixed products, and suggests consumers are “getting more for their money.” So, when people refer to hybrid annuities, what do they actually mean?
Let’s take a step back and look at the components of an annuity:
One component is a fixed rate account. The second component would be in a variable account if it’s a variable annuity, or an index account if it’s an index annuity. Investors can make the annuity more conservative by weighting more money to the fixed account for a guarantee rate of return, or make it less conservative by weighting it more to the variable accounts that offer potentially higher returns.
By introducing a fixed rate component to a variable annuity, the investor has an opportunity and method to make his or her financial vehicle more conservative. Having mutual fund sub-accounts along with the fixed rate allocation can give the investor the possibility to reduce the volatility in their variable annuity. It can also reduce the fees that they’re paying on their annuity as well. In addition, some of these policies may allow additional premiums in the future. The fixed rate account can help soften the negative returns in a bearish market.
In an index annuity, the fixed rate component can provide a steady stream of interest while the index strategies can return variable interest to the account. There are no negative returns to the account in an index annuity. The index annuity, through the use of index strategies, can return much higher interest during a positive market period.
Keep in mind that these annuities have the option for the investor to turn them into an income stream. That stream of income could have the option to increase each year based on the underlying performance of the annuity accounts chosen.
The idea of a hybrid annuity is not new. These underlying financial vehicle choices in variable and index annuities have been around for many years. The strategy choices have expanded over the years, which has made the policies more complex and difficult to understand. Also, annuities are illiquid. They are longer-period financial vehicles and are subject to withdrawal penalties in the early years.
In reality, most annuities offer multiple benefits of some fashion. So, to save from confusion and misinterpretation, it’s generally easier to use the actual product name, and whether it’s with or without optional riders or features.
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