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A Guide to Hybrid Annuities
The world of annuities may seem scary and unreliable to some people. To ensure guarantees, financial institutions have created hybrid annuities. These hybrids guarantee payouts to the owners who purchase them. They’re used to fill the gaps in retirement income, make sure death payouts happen, or provide home health care benefits.
As people approach retirement, they want financial security for both income and medical emergencies. Hybrid annuities guarantee both these things as they provide a fixed income for the rest of the owner’s life, and they allow financial support and withdrawal options for medical emergencies or even long-term care.
The Meaning of Hybrid Annuities
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Hybrid annuities, also known as hybrid income annuities, are insurance contracts where buyers can use fixed and variable annuity components to allocate funds. They’re a combination of several unique aspects of various annuities that are combined to create a new type of annuity. Essentially, it’s a fixed index annuity, with one of the newer more innovative income riders. They resolve the concerns to asset growth and retirement income, like long-term care funding or wealth transfer to heirs, while still providing the owner with a secure income.
Hybrid annuities are the answer to satisfying a combination of retirement objectives into one solution. You obtain a hybrid annuity just like you would a regular annuity: after comparing rates, features, and ratings that meet key retirement objectives, and you would fund the hybrid annuity contract with a licensed agent. You can use an annuity calculator like the FI annuity calculator, to get an idea of your payments.
With some hybrids, funds are required for needs such as long-term care, so owners can have access to withdrawals for that purpose by way of an accelerated cash account payout or a guaranteed increased income payout. This can be for as long as it’s needed in some cases.
If the funds aren’t needed for that purpose, the owner will receive their lifetime guaranteed retirement income just as it was structured, or use the annuity for moderate growth as a secure asset foundation to balance a portfolio.
Explaining Income Riders
Income riders are increasingly popular, with several types of annuities including fixed and hybrid. This feature guarantees the principal and income of hybrid annuities. The income rider bears all the risk associated with the guaranteed payout and they allow you to build retirement income guaranteed by the issuing insurance company for your lifetime.
More than 50 percent of people who chose to purchase a fixed annuity also chose to add an income rider. Originally, income riders were introduced on variable annuities at the turn of the twenty-first century to protect the annuities ability to generate future income even with investment risk to principal. They accomplish this by guaranteeing the minimum level of income that can exceed what is payable from the annuity investment account value. It’s paid at a potentially higher income rate regardless of weak growth or losses in the variable annuity investment account value.
If long-term care is needed, you can depend on an income rider to cover healthcare expenses at home in a medical facility. This is in addition to having recurring retirement income payments.
There are many advantages to a hybrid annuity. The annuity has potential for five to seven percent growth. It also has the ability to have income increases based on inflation (with limits). There is upside market potential through the Dow Jones Industrial Average or the S&P 500. There is no downside to market risk because there’s no actual market investment.
Also, you will never outlive the income because it’s similar to a pension-style income. You have the majority control of your assets to cover unexpected expenses. You can leave the full account value to heirs, after what you have withdrawn is subtracted.
There are several disadvantages to hybrid annuities, along with misconceptions that should be cleared up. The five to seven percent growth guarantee is not on the cash. Most do not have increasing income as an inflation hedge — this is more specific to unique hybrid annuities, so most annuities do not have this feature. The upside market potential gains also are limited.
The fees charged for income riders cost typically less than one percent. Surrender charges amount to arround ten percent for excessive withdrawals in early years. Finally, heirs may pay ordinary income tax rates depending on how the hybrid annuity is structured.
Hybrid annuities are a good idea for someone who is wary about annuities, but still want income when they retire. Talk to a financial advisor today to see if a hybrid annuity is a good idea for your future.
Author Jane is a freelance writer who loves to write about anything from tech to mommy stuff. She is featured in many blogs as a guest writer, and can write with authority on any niche or subject.