Hybrid variable annuities blend the growth opportunities of traditional variable annuities with features designed to offer more stability, giving you the best of both worlds. These annuities allow you to invest in subaccounts, like a typical variable annuity, but often include built-in protection options, helping to mitigate risks while preserving growth potential.

In this blog, we’ll cover the key elements of hybrid variable annuities, their benefits, potential risks, and who might benefit most from this unique approach to retirement planning.

1. What Is a Hybrid Variable Annuity?

Hybrid variable annuities are designed to combine market growth with protective features, offering flexibility while addressing common concerns about traditional variable annuities. In most cases, hybrid annuities include income and withdrawal guarantees, helping to reduce downside risk if markets decline.

• Market Exposure with Protection: Hybrid annuities give you the ability to invest in the market but offer protection, like minimum income guarantees, to prevent losses from market dips.
• Income Stability: With income riders, hybrid variable annuities can ensure a steady retirement income even if investments don’t perform well.
• Customization Options: These annuities allow for tailored approaches, where you can select the level of income and investment protection based on your needs.

2. How Hybrid Variable Annuities Work

Hybrid annuities operate in much the same way as traditional variable annuities but add features for enhanced security:

• Accumulation Phase: Your funds grow as they’re invested in market-based subaccounts of your choice. Some hybrids also offer “buffer” features that protect against losses up to a certain percentage.
• Distribution Phase: Once you start drawing income, these annuities often offer lifetime income options with rider benefits, ensuring consistent payouts even in lower-performing years.

3. Benefits of Hybrid Variable Annuities

Hybrid variable annuities are attractive to those looking for growth potential with added peace of mind. Key benefits include:

1. Market Growth with Downside Protection

Hybrid annuities provide the opportunity to participate in market gains without full exposure to losses. This is achieved through various protective mechanisms, such as buffers or floors, which reduce losses up to a set limit.

2. Guaranteed Lifetime Income

Many hybrid annuities come with guaranteed income riders. These ensure a minimum payout amount, often for life, regardless of how your investments perform. This can be particularly valuable if you’re looking to maintain a predictable income stream.

3. Tax-Deferred Growth

Similar to other annuities, hybrid variable annuities allow your money to grow tax-deferred, enhancing the impact of compounding returns. You won’t pay taxes until you begin withdrawing funds, which can benefit high-income individuals planning for retirement.

4. Death Benefit Protection

Hybrid variable annuities often come with a death benefit option, guaranteeing that beneficiaries will receive a minimum payout, even if the market value of your annuity has decreased. This adds a layer of security for those wanting to leave a legacy for loved ones.

4. Risks of Hybrid Variable Annuities

While hybrid variable annuities provide a balance of growth and protection, they come with some risks to consider:

1. Limited Growth Potential

The protective features, like buffers and floors, may limit the extent of gains in years when the market performs well. Some hybrid annuities cap growth at a specific rate, which can reduce returns if the market is thriving.

2. Higher Costs and Fees

Due to the added features, hybrid variable annuities generally have higher fees than traditional annuities. Typical charges may include:

• Rider Fees: To support income or death benefit guarantees.
• Management and Administrative Fees: Covering the cost of account management.
• Surrender Charges: Apply if funds are withdrawn early in the surrender period.

3. Complex Terms

Hybrid variable annuities often have detailed terms and conditions. Understanding the specific guarantees, limits, and fees is essential, as these products can be complicated. Working with a knowledgeable financial advisor can be invaluable for navigating these intricacies.

5. Who Should Consider a Hybrid Variable Annuity?

Hybrid variable annuities can be a valuable option for specific retirement goals:

• Investors Seeking Balance: Those looking for market growth with downside protection may find hybrid annuities ideal, as they offer growth potential without full market risk.
• Retirees Needing Income Stability: If you value steady income and don’t want to be impacted by market downturns, hybrid annuities with income riders can ensure predictable payouts.
• Individuals Nearing Retirement: If you’re close to retirement and prefer a degree of market exposure without risking your core savings, hybrids offer an attractive solution.

6. Comparing Hybrid Variable Annuities with Other Annuities

To make an informed choice, consider how hybrid variable annuities stack up against other types:

If you’re drawn to market returns but don’t want to shoulder full risk, hybrids provide a middle ground, blending variable growth with fixed protections.

7. How to Evaluate Hybrid Variable Annuities for Your Needs

Before purchasing a hybrid variable annuity, evaluate the following:

• Protection Features: Ensure the buffers and floors match your risk tolerance and needs.
• Rider Benefits: Some riders come with additional costs, so confirm they provide value based on your goals.
• Fee Structure: Review all fees carefully to understand the potential impact on your investment.

Conclusion

Hybrid variable annuities offer an appealing combination of growth and protection, providing flexibility to adapt to market conditions while supporting income stability. While higher fees and complexity may be drawbacks, the balanced approach they offer can be ideal for investors seeking growth with protection in their retirement strategy.

As always, it’s wise to consult a financial advisor to explore whether a hybrid variable annuity fits your unique financial situation, helping you create a balanced approach to retirement that aligns with your goals and risk tolerance.