Hybrid Annuities: What is a Hybrid Annuity?

By Compuquotes Team on May 12th, 2008


Like the term suggests, a hybrid annuity is a cross between a fixed and variable annuity. An investor buys units of a variable annuity and the balance of his portfolio is used to buy units of a fixed annuity.
The baby boomers constitute one segment of the population who stand to gain from hybrid annuities. Given their rising popularity, the country's top life and annuity companies are designing more hybrid products that are designed to provide a lifetime of income with more flexibility in payment options.

A report online indicated that 2006 proved to be a success for annuities, with sales reaching as high as $236 million. The year 2007 will witness competition in the annuity field as more companies scramble to find ways and means to satisfy their clients' needs for variety, tax-deferrals and different payout schemes. It is the income-for-life benefit that appears to be the most attractive feature of hybrid annuities.

  • The 50+ Group

Over five thousand American baby boomers are retiring everyday; in less than 20 years, about 45% of Americans will reach the age of 50 and up. This particular group has expressed the need for the kind of financial comfort that cannot be achieved through their real estate and investment portfolios alone. They look to the country's top insurers that can offer continuing liquidity and guarantees for a stable income stream. However, not many companies are either not willing or don't have the resources to cater to this particular age group.

One possible explanation is that insurance companies do not have the mechanisms in place to combine asset accummulation and asset distribution. The tradition was to keep these two separate, but clients are more demanding and are clamoring for these two transactions to blend into one product.

  • Hybrid Annuity also known as…

A hybrid annuity is also known as a combination annuity. The investor can split his annuity such that he can take advantage of the benefits of both fixed and variable annuities. A portion of his investment goes into a fixed annuity with a fixed term and rate, hence offering security, while another portion of his holdings is used to invest in a variable annuity where the rate is not fixed and there is more risk, although there exists the potential for a higher return.

  • To find out if this product is suitable for you, you need to:

a) meet with your financial planner, or arrange to meet with someone who is licensed and competent to describe a hybrid annuity in detail

b) calculate the total amount of your savings (cash, bonds, treasury notes, mutual funds, stocks, real estate, material possessions, etc) and decide how much you will need to withdraw from these to finance your lifestyle and how much you can invest for income growth

c) think about estate planning and find out what the tax implications would be

d) decide if you want to leave an inheritance to members of your family

e) assess your tolerance for risk (because a hybrid annuity invests in variable annuities as well with fluctuating returns).

Finally, note that hybrid annuities are not necessarily for retirees; they can be the perfect financial product for individuals with longer time horizons and are interested in the bond and stock markets as vehicles to grow their investment holdings.

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