Hybrid annuities are a type of insurance contract that allows the account holder to allocate his or her assets into a fixed annuity that has a market benchmark component. Sometimes it also comes with an income rider that gives considerable guarantees to secure a number or retirement goals. In general, a hybrid annuity combines the features of more than one type of annuity.
A hybrid annuity is also known as an indexed annuity. It offers a fixed interest rate and also has another additional rate that is determined by the market index. The market index is a tool used in finance to monitor the performance of stocks. When the index shows that there is growth in the specified stock, the investor receives additional profits.
Fixed index annuities are types of hybrid annuities that are sold by insurance companies. These investments take a small annual fixed interest guarantee and add some extra higher returns through accounts that mirror a market trading index. Just like any annuity, the fixed index annuity offers tax-free earnings and avoids probate by allowing the owner to name his or her beneficiaries.
Apart from asset growth and retirement income, hybrid annuities can be used to address several other issues. Some of them include long-term care funding and wealth transfer to heirs. This ensures that one’s retirement needs are covered completely.
Obtaining a Hybrid Annuity
Getting a hybrid annuity is not difficult. An investor goes through the same process that he or she would go through when obtaining any other type of annuity. First, one needs to compare the rates and features that are offered by the annuity. He or she should ensure that the rate and features meet his or her retirement requirements. Once the person has made up his or her mind, he or she can go ahead and fund the hybrid annuity contract through a licensed agent.
Some hybrid annuities allow one to withdraw money for needs such as long-term care. The withdrawals can be through guaranteed increased income payout or accelerated cash account payout. In some cases the withdrawals can be made for as long as needed. However, if a person does not need the money, he or she receives guaranteed retirement income as structured in the contract. Alternatively one can use the annuity to achieve moderate growth as a secure asset base to balance his or her portfolio.
Calculating Returns Of A Hybrid Annuity
Hybrid annuities, such as the fixed indexed annuity uses participation rates and rate caps to calculate the yearly return on investment. Investors do not get the actual market index return. This is because the insurance company has to pay for the minimum guarantee and this is deducted from a person’s return in the profitable years. As an example, fixed index annuities may be able to provide one with a minimum guarantee of 1%. This comes with an 80% index participation rate that is capped at an 8% annual return.
For instance if the index mirrored goes up 5% in the strong market, the return would be 4% (5%*0.80=4%). If the market goes higher than this, the return would still be 4% since this is the cap that has been set. If the market index goes down by 5% in a bad year, the investor gets 1%, which is the minimum guarantee.
Hybrid Annuity Risks
There are risks associated with some hybrid annuities. Time horizon and accessing capital from the annuity are some of the primary risks of investing in hybrid annuities. Hybrid annuities have terms of at least 3 to 15 years. If an investor decides to withdraw money before the distribution period, he or she may lose some principal due to the penalty that is charged when one decides to liquidate early.
Another risk lies in the penalization of distributions made before the age of 59 ½ years, by the IRS. The penalty is usually 10%. Insurance company insolvency is also another concern that most annuity investors have to cope with. If the insurance company fails future guarantees on annuity may be lost. Principle would be protected up to $250,000 in most cases by your state’s legally required guarantee association. To see if your state has a guarantee association and what the amount of principle they will protect just Google your state name followed by the words guarantee association.
Investors need to look at all aspects of a hybrid annuity so as to understand whether it is the best fit for investment and personal needs. One should also take a look at the length of the annuity contract and his or her age, so as to know if the annuity will serve him or her through retirement. The annuity should also offer the required liquidity features. If it does not, it will prevent the investor from accessing the money, since hybrid annuities tend to have higher surrender charges than other annuities. In case one does not understand what some of the terms mean, he or she should get advice from an expert in annuities.