One of the most interesting changes in the annuity landscape in recent years are ‘Hybrid Annuities’
Now, ‘Hybrid Annuities’ are called a marketing term for a fixed index annuity, equity index, or variable annuity with a lifetime income rider. What makes it exciting however is that it’s a hybrid of the guarantees of a fixed contract, with the actuarial-driven income benefits of a lifetime income annuity.
When you utilize an index annuity with the income rider, you have a great way for Safe Money to grow, and to still produce income for life.
In addition to income benefits, there are often other benefits and riders on these contracts such as home health care coverage, death benefits, and disability payments. These additional coverages add to your overall benefits package. Of course, with benefits come costs.
This hybrid of benefits puts a lot of moving pieces in one contract. This can be a good thing or a bad thing depending on your situation. As with most annuities, it really depends on you if it is right for you or not. For many people, these are a perfect fit. Lets understand a few reasons why….
How To Determine If A Hybrid Annuity Is For You:
Hybrid annuities are attractive to investors who have some years of deferral, then wish to turn their accumulated savings into income. This allows investors to make one decision, and set and forget. If you are aligning your interest with a solid company with an excellent credit rating, this can be a great peace of mind.
For example, a single lump sum investment of $100,000 today deferred for 10 years in a fixed index annuity with a guaranteed 7% rollup value will have a $200,000 benefit value at the end of the term. Going in, you know you can turn a $200,000 benefits base into a lifetime income stream at a specific future date, and going in you know exactly what that income stream will be. Having this level of security can be very reassuring.
Your actual account value- the amount of money you really have- however is a different calculation, and it is important to understand before going in in case your circumstances change in you need to cancel the contract or withdraw some of your money. Let’s look at those methods of calculation in detail.
A hybrid annuity will generally feature two main methods of calculation.
First, there is an account value. The account value is your premium dollars growing at a rate determined by the market index, the crediting method, and subject to any caps or participation percentage of your contract. Terms you will see in determining the crediting method are: “Monthly Point to Point”, “Annual Point to Point”, “High Water Mark”, and “Averaging”. for detail on each of these, please see our page titled Index Annuity Crediting Methods.
The second portion of a Hybrid Annuity is the benefit value. This also can have several terms, such as “the benefits base,” “income account value,” “benefit value,” and “lifetime withdrawal benefit value.”
The Income Account benefit value is a separate calculation from your account value. Often times, annuity companies will also offer a bonus rate that may be credited to either your account value or your benefit base, or both, when you open a new account. It varies from company to company. They also generally offer a guaranteed level of appreciation in this Income Account.
Pitfalls With Hybrid Annuities
What can be very misleading is when people confuse the account value and the benefit value. It is very easy to think that your annuity is growing at a fixed, guaranteed 8% or 10% per year when in fact it is your benefit value that may be growing at that rate while your account value is subject to much lower participation rates and index crediting methods.
This is where annuity agents and individuals get in trouble.
Understanding the Account Value Vs the Benefits Value.
Typical annuity marketing documents will stress the benefits, which are usually tied to the Income Account Value or benefit base. For example, you may see terms such as ‘Your account is guaranteed to go up 8% every year.’ You may think that your money is guaranteed to grow at 8%, when in fact, it is the Income Account or benefits base that will increase by 8% every year.
The Income Account, or benefit base, is not an amount of money you can ever access. This is not necessarily a bad thing, it’s just very important to understand.