What is a Hybrid Annuity
A hybrid annuity is a type of insurance contract that allows investors to allocate funds to fixed-rate and variable annuity components as part of the same investment vehicle. Most hybrid annuities allow investors to choose the how they want to allocate assets. Investors can skew their assets to more conservative, fixed-return investments that offer a lower but guaranteed rate of return, or weight them toward more volatile variable annuity investments that offer the potential for higher returns.
BREAKING DOWN Hybrid Annuity
A hybrid annuity gives investors more allocation options than a standard annuity. Their design allows a portion of an investor’s money potential to grow in a mutual fund sub-account while also providing guaranteed income in a fixed allocation. Other hybrid contracts may pair a fixed annuity with an indexed product in an effort to guarantee principal in both segments. Like all other annuities, hybrids can be immediate or deferred with fixed or flexible premiums.
Among their positives, hybrid annuities offer the possibility of increasing income with the growth portion of the contract, which essentially acts as an inflation hedge. Contracts with fixed and variable components also offer lower downside risk than a variable annuity. As for negatives, the dual framework adds complexity to these products, which is a deterrent for many investors lacking financial expertise. Many hybrid products also have high fees and charge schedules that clients may not account for at the time of purchase.
Another negative may be that hybrid annuities may be something of a misnomer, in that most annuities provide growth and income. Nearly all variable and indexed annuity products today come with guaranteed income riders and features that allow investors to lock in guaranteed income and upside potential, negating the attractiveness of hybrids.
Target Market for Hybrid Annuities
Hybrid annuities can be useful for those who have longer time horizons. In general, annuities are appropriate for investors seeking stable, guaranteed retirement income. Annuity holders cannot outlive the income stream, which hedges longevity risk. Notably, the lump sum deposited into the annuity is illiquid and subject to withdrawal penalties, so annuities are not recommended for investors who need liquidity. Some investors may look to cash out an annuity at a profit, though that is contrary to the investment strategy behind these products.
As with any investment, an investor’s risk tolerance should be considered prior to purchases and subsequent allocation. Also, investors should understand the fees for the fixed and the variable portions of a hybrid annuity.