how a hybrid annuity works
a hybrid annuity is a combination of two or more annuities a fixed annuity contract and a variable annuity contract that are both placed in the same annuity product its design allows a portion of an investor s money to be placed in a mutual fund sub account which is the variable component the remainder is kept separate in order to guarantee payment of a set amount after retirement which is the fixed component a hybrid annuity gives investors more options for investing than a standard annuity such as pairing a fixed annuity with an indexed product in an effort to better protect the principal in both segments effectively they allow the backing of a fixed rate annuity and a variable rate annuity in a single product hybrid annuities can be used by anyone but they are best suited for those saving for retirement that are seeking both growth and stability via income payments or as a hedge against inflation special considerationshybrid annuities might not be a one size fits all investment which is what they are sometimes marketed as they can be useful for those who have longer time horizons but who aren t well into retirement younger investors could also opt to merely invest in equities and likely generate a better return over the long term most professionals agree that younger investors should opt for the latter strategy rather than investing in annuities in general annuities are appropriate for investors seeking stable guaranteed retirement income annuity holders cannot outlive the income stream which removes longevity risk notably the lump sum deposited into the annuity is not liquid it is subject to withdrawal penalties annuities are not recommended for investors who may need access to their cash some investors also may look to cash out an annuity at a profit although that is contrary to the investment strategy behind these products as with any investment an investor s risk tolerance should be considered before making an annuity purchase as well as an assessment of their liquid cash needs advantages and disadvantage of hybrid annuitiesas with any annuity hybrids can begin paying out immediately or be deferred with fixed or flexible premiums among other positives hybrid annuities offer the possibility of increasing the investor s income and hedging the assets against inflation the mix of fixed and variable components lowers the downside risk as for negatives the dual framework adds complexity to these products which is a deterrent for many investors hybrid products also may have higher fees including high charges on the back end when the holder goes to surrender or cash in the annuity these fees are also not prominently displayed i e sometimes hidden the key argument against hybrids is that they are over complicated expensive and over designed in fact most annuities provide some sort of growth and income components that is nearly all variable and indexed annuity products today come with guaranteed income riders that somewhat negates a major selling point of hybrids 