The allure of a hybrid annuity is undeniable. They are marketed with the potential for market-based appreciation, protection from market volatility, and the benefits of lifetime income. With those characteristics, a hybrid annuity is definitely something worth considering. It is an all-in-one product that also offers liquidity for emergencies and accelerated payouts for home health care issues.
But like a Swiss Army knife that rolls a lot of tools into one product, you need to know that no single element of the hybrid annuity is going to perform as well as a single purpose annuity. If it’s ONLY growth you need, or ONLY income, there are better ways to accomplish those specific goals…. But if you want a little of each, read on…..
An Index Annuity’s accumulation account is invested conservatively by the issuing insurance company in a way that credits you a portion of the gains in a market index, e.g. the S+P 500 or the Dow Jones. An account value can increase, but losses in the market do NOT affect the account, with these gains.
Put simply, investors would have no volatility and no risk of loss to their money in an index annuity.
That said, the portion of the gains in the underlying index that are credited to your account may be lower in a ‘hybrid’ annuity than they would be in a pure growth-oriented contract. This is detailed in our page on ‘index annuity crediting methods’.
Hybrid annuities can also provide lifetime payout options. In order to calculate the lifetime income amount, the insurance company grows an ‘income account’ by some contractually determined ‘roll up’ rate. The income account accumulates, then when you turn on the lifetime income, the amount of income you get is a percentage of this income account base, known as the ‘payout rate’
You may have seen hybrid annuities advertised with ‘8% Annuity’ ads. Well, as with all things that sound too good to be true, this 8% rate would apply to your income account value. Sure, the longer you leave your money invested, the larger this income account grows… but it’s not money you ever have access to.
Here’s a quick example- you invest $100,000 at your age 65, with an 8% roll-up rate and a 5% payout rate when you turn 70. Your initial $100,000 account value will be in the index, and a corresponding income account of 100,000 is also started on day one. By the end of year 5, the income account is $146,933 and 5% of that is $7,347/ year in income.
|Income Acct- Opening Balance
|Roll Up Rate
|Income Acct- Ending Balance
Note above that there are no $ signs on the income account balance- as mentioned previously, this is not a real dollar value account you can access. It’s only used to calculate the lifetime income payout.
Now, you have a lifetime income of $7,347, and it is being drawn first from your actual account value until that is depleted, then it’s drawn from the insurance company as long as you live. And if you die before the account value is depleted, that money goes back to your heirs.
Here’s the catch though- you can get this same kind of end result from an immediate annuity with a return of premium option, and typically it has a higher payout rate. Sometimes, the added complexity of the hybrid annuity does not equal more benefit.
Some other features of these hybrid annuities include:
- Provisions to allow withdrawals of a portion of your money each year for liquidity needs.
- Provisions to increase your income if you have a Long Term Care or disability issue,
- Enhanced death benefits for your heirs,
- Some also offer a signup ‘Bonus’ credit to your Income Account when you open a new account.
To be fair, these features are appealing and address many of the issues people have with single premium immediate annuities and with fixed annuities. There is real value in these features.
But nothing comes for free. Hybrid index annuity contracts, e.g. hybrid annuity with long term care, do have some fees, and a lifetime income rider is typically 1% of the account per year. In addition, you will also be subject to surrender schedules.
That said, these fees are VERY low and are one of the hybrid annuity’s best attributes, especially when compared to variable annuities.
To sum it up, hybrid annuities offer investors potential appreciation, zero volatility, lifetime income, along with liquidity options and long term care benefits. They roll up a lot of benefits into one contract.
By design, they address many situations the typical retiree may face, and there are aspects of the contract to address many needs. But sometimes people buy hybrid annuities when more efficient or lower cost annuities might do a better job. It’s best to ensure you’re getting expert advice when considering annuities and that is what we’re here for.
Reach out to us if you’d like to:
- Schedule a 1-on-1 video call to discuss your specific needs and situation
- Ask questions about products, carriers, or DCF Income Payments
- Discuss how a DCF Income Payments and newly-issued annuities may (or may not) fit into your portfolio