Hybrid Annuities and Fixed Index Annuities. Here are our posts with detailed analysis and advice on Hybrid Annuities. Remember, hybrid annuities and fixed index annuities usually refer to the same type of contract.

The Benefits Of Hybrid Annuities

A hybrid annuity offers the potential for market based appreciation, protection from market volatility, and the benefits of lifetime income, all in one product.  Hybrids also offer liquidity for emergencies, and accelerated payouts for home health care issues.

An Index Annuity with Guaranteed Lifetime Income Rider, or ‘hybrid annuity’, is invested conservatively.  Earnings from the annuity are invested by the issuing Insurance Company in a way that credits you a portion of the gains in a market  index, such as the S+P 500 or the Dow Jones.  These gains can increase your account value, but losses in the market do NOT affect your account.

You have no volatility and no risk of loss to your money in an index annuity.

Lifetime Income Without Annuitization

Hybrid annuities also offer lifetime payout options, without ‘annuitizing’ your assets and forfeiting your money.  To calculate the lifetime income amount, the Insurance Company grows an ‘income account’ every year that you leave your money invested.  The longer you leave your money invested, the larger this income account grows.

When you decide to start taking lifetime income, the company uses a ‘payout rate’ to calculate your lifetime income.  For example, if you started with $100,000, and your income account rolled up at 7% per year for 10 years, your income base would have grown from 100,000 to roughly 200,000 in that time.  The payout rate depends on your age when you start income, but lets assume it’s a 6% payout.  Rollup Rates and Payout Rates vary with each carrier.

When you decide to start the lifetime income, you receive 6% of the 200,000, or $12,000 per year, for life.  Of course, this income can be a joint payout too for you and a spouse. Even if your actual account value drops to $0, the lifetime income continues.

Account Value

One of the many benefits is that if you die after only a few years of income, your heirs will get whatever is in your account value.  This is a huge advantage over other kinds of annuities.

A few other perks of these contracts include: provisions to increase your income if you have a Long Term Care or disability issue, enhanced death benefits for your heirs, and provisions to allow withdrawals of a portion of your money each year for liquidity needs.  Some also offer a signup ‘Bonus’ credit to your Income Account when you open a new account.

Low Fees

One of the best aspects of hybrid index annuity contracts is that they come with very low fees.  The lifetime income rider is typically just 1% of the account per year.  And while there are no other fees, you may be subject to surrender schedules just as you would have with a CD.  Overall, the low fees are a major advantage over expensive Variable Annuities.

Hybrid Annuity Benefits Summary

In sum, Hybrid Annuities offer potential appreciation, zero volatility, lifetime income, together with liquidity options and long term care benefits.  They are a great option for investors seeking safety, security, income, and flexibility in retirement.

Learn more about Hybrid Annuities and sign up for our special reports on these exciting retirement income opportunities.

All You Need To Know About Hybrid Annuity Crediting Methods

Every hybrid annuity, whose core is an index annuity, comes with one or more crediting methods which are nothing more than a means to calculate the amount of interest to be applied to the account value.

Total interest credit is subject to any one or more of the caps and participation pricing controls previously mentioned, as defined by the contract.  There are several crediting methods available depending on the contract, but I’ll focus on the most common methods.

Annual Point to Point– The beginning and ending index value are used to calculate the total gain or loss.  For example, if the S&P 500 starts the year at 1000 and ends at 1100, the interest credit would be 10%, subject to the participation rate, cap rate or spread.  If the annual return is 0% or less, no interest will be credited.  So, while the option contract that gives you participation in the market expired ‘out of the money’ the underlying principal value, guaranteed by contract, cannot lose value.

Monthly Point to Point Same as above, but the period is a month rather than a year, and also subject to the participation rate, cap rate or spread.

Monthly Average Each monthly anniversary, the level of the index is recorded.  Those levels are added up at year’s end and the total is divided by twelve and compared to the index level at the beginning of the year.  The difference represents the gain or loss for the year, subject to the participation rate, cap rate or spread.  If the annual return is 0% or less, no interest will be credited.  Again, while the option contract that gives you participation in the market expired ‘out of the money’ the underlying principal value, guaranteed by contract, cannot lose value.

Monthly Sum The gain or loss in the index every month is recorded.  Each value is totaled to calculate the annual gain or loss, subject to the participation rate, cap rate or spread.  If the annual return is 0% or less, no interest will be credited.  Again, while the option contract that gives you participation in the market expired ‘out of the money’ the underlying principal value, guaranteed by contract, cannot lose value.

What Is The Best Hybrid Annuity Crediting Method?

Extensive studies attempt to determine which crediting method is most profitable.  No single method has shown total superiority as each works well in different market conditions.

Most Index Annuity contracts offer multiple crediting methods and ways to change allocation for portions of the account between different methods.

Choice of crediting method will depend on your view of where the market is going.  But since no one really knows for sure, the prudent strategy is to divide your premium investment between the various crediting methods available in your contract.

Understand Exactly How a Hybrid Income Annuity Works

The most common hybrid income annuity is a ‘fixed index annuity with guaranteed lifetime income rider’. The catchy phrase ‘hybrid annuity’ is easier to type so we can go with that from here. But, before trying to understand how it works, you must first understand how a basic fixed index annuity works.

Fixed Index Annuity Summary:

Essentially, an index annuity gives you the opportunity to capture a portion of market gains without the risk of losing your principle. Annuities are backed by conservative investments like bonds and treasuries.

With an index contract, the insurance company takes the interest earnings on those investments and purchases an option in a market index. If the option turns a profit, the gain is credited to your account subject to the Crediting Methods and subject to the Caps and Participation. If it expires worthless then nothing is lost. So, you can win but you can’t lose.

What Makes It A Hybrid Annuity?

A hybrid income annuity adds an income component to this basic index annuity contract, and is designed to offer a future guaranteed level of income regardless of market performance.

In addition to income, you will see options for an enhanced death benefit and long-term care riders. Explore these Hybrid Annuity Income Riders Here. 

As layers are added it can seem to get more complicated but it’s fairly simple if presented properly. Let’s briefly explain each component in order to keep things organized.

  • Guaranteed Lifetime Income– This is the level of lifetime income you will receive. There are really two guarantees here. There’s a guarantee that the level of income will increase by a certain percentage for each year of deferral and the guarantee that when payments start they will not stop or decline in amount as long as you are living.
  • Enhanced Death Benefit– At death this benefit guarantees that your heirs will receive a greater amount of cash than would be available if just the account balance were paid out.
  • Long-term Care Rider– This allows for a substantial increase to your guaranteed lifetime income amount in the event that you require long-term care assistance. Definitions, requirements and enhanced payment amounts will vary greatly between contracts.

Putting the Pieces Together:

Now that we have those defined I need to show how they all work together to create a hybrid income annuity.

For starters you have your initial deposit that grows as only a fixed index annuity can, which means you achieve interest credit per the crediting methods and according performance of a market index  but cannot lose money in any given year.

Next you have the death benefit that is paid to your heirs when you pass away. This will equal either the enhanced death benefit amount or the account value, whichever is greater.

And finally we have the guaranteed lifetime income rider that accumulates for every year of deferral and is paid out on an age based percentage, guaranteed for life.

The Hybrid Income Annuity In Action

Let’s take a look at this plan in action… I assumed the purchase of a contract on January 1, 2001 and deferred for ten years. This happens to have been a wonderful time to have owned an index annuity as the volatility of that time period wreaked havoc on retirement accounts for most people. For this example I will use the annual returns from the S&P 500 including the following contract components that are essential for making all the calculations:

  • Annual Index Annuity Cap Rate: 5%- indicates the maximum growth available in your account
  • Income Account Value: 8%- each year of deferral, your future income benefit will increase by this amount regardless of account performance. Additional fees may apply.
  • Enhanced Death Benefit: 4%- each year of deferral, your death benefit will increase by this amount regardless of account performance. Additional fees may apply
  • Income Payout Rate: This is an age based percentage applied to the income account value in order to calculate your level of guaranteed lifetime income. Generally ranges from 3.5% up to 7% of the Income Account
  • Long-term Care Rider: 2X Guaranteed Lifetime Income should you be in the need of long-term care assistance. This varies with every carrier but 1.5-2X is fairly typical.

Please note that this example is used for illustrative purposes only as availability of contract terms varies by state and depends entirely on current market conditions. We’ll assume the contract was purchased at age 56 and held to age 65. Please note that additional fees for some of these riders and benefits may apply but have been eliminated from this illustration for purposes of simplicity.

Hybrid Annuity Illustration Table

hybrid annuity illustration

hybrid annuity illustration

In the table above the colored columns indicate the different riders. This is where all the confusion starts but I’m going to make it as simple as possible… you will only get the value of ONE of these columns.

Notice that the Income Account Value column is not highlighted and has no dollar sign. You WILL NOT receive that in a lump sum or in any other way because it is not your money. It is simply an amount used by the insurance company to calculate the lifetime income amount shown two columns to the right.

If what you just read seems contrary to what someone else is telling you, then stop talking to that person because they are lying to you.

Here are the basics of what you can expect:

  • If you decide to cancel the contract, you’ll get the account value less any surrender charges.
  • If you die, your heirs will receive the death benefit.
  • If you take the lifetime income benefit, you will receive the scheduled payment annually for life.
  • If you qualify for long-term care, you will receive the indicated boost in lifetime income.

It’s hard to make it more complicated than that but apparently plenty of advisors do.

Now, you must remember that if you begin taking lifetime income, your income payments will be deducted from your account value. Your account value may continue to grow in the market, but the balance will also be going down by any income payments taken.

However, even after you start the income stream, there will be a remainder account value and death benefit for a certain period of time, until your cumulative withdrawals deplete the account value and your payments are made fully by the Insurance Company. It is possible for you to still walk away with a chunk of cash or pass money to your heirs before that time, but as time goes by and the income payments are subtracted from both the death benefit and cash value, the account value dissipates.

Using The Hybrid Annuity For Retirement Income

These contracts have a definite place in the retirement portfolios of many individuals. They work very well for a variety of situations, but must be understood clearly in order to be used correctly.

For case studies and to see how this type of annuity can work for you, be sure to sign up to the site for case studies and a guide on how to select the right hybrid annuity for your situation.

All About Hybrid Annuity Caps, Spreads, And Participation Rates

Hybrid Annuity Caps:

There are three different ‘pricing controls’ an insurance company can place on a contract that are specifically meant to apply an interest credit that’s in line with the net gain from the option.  Depending on the company or product you are considering, you may see one or more of these terms.

Participation Rate- This specifies the percentage of the index growth available for credit to the account.  Example- a 10% gain in the S&P Index in a contract with a 50% participation rate means you would be credited with a 5% gain to your account value.

Cap Rate Another option is to have a stated maximum level of interest, or a cap, available for account crediting.  Example:  A 5% cap rate means if the index goes up 10% and you have a 5% cap, you will be credited the 5%.

Spread- This is a fee imposed on the index credit that represents overall operating expenses for the insurance company. Example: In a year when the index gained 10% and you have 50% participation and a 2% spread, you would have 50% of the gain- 5%- and that 5% credited gain would be reduced by a 2% ‘spread’ charge.  You would net 3%.  In most cases, in years where there is no index gain, no spread is assessed, so you can’t go backwards.

Pricing Controls Summary:

Every annuity will apply one or more of these pricing controls.  They have only so much income from the ‘fixed’ account to work with as an option investment, so it’s only logical that they would limit the amount of gain.  These limitations are also explored in the page about Crediting Methods.

Remember, your money is NOT invested directly in the markets, and NOT subject to risk of loss.  So don’t think that the insurance company is ‘taking’ anything away from you with their caps, participations, and spreads.

You are buying appreciation potential, AND downside protection.  Downside protection necessarily comes at some cost.

Of course, we’re ready to assist you picking the best contract for your needs.  Simply give us a call.

To Get Started With Us Call 800-438-5121

The Definitive Guide To Hybrid Annuity Income Riders And Rates

Hybrid Annuity Income Riders

The hybrid annuity income riders are optional attachments to many contracts. This is the point where an index annuity becomes a ‘hybrid annuity’.  When lifetime income riders are attached to the underlying fixed index annuity, the annuity takes on new benefits, and a little more complexity.

With an income rider, a calculation starts at the beginning of a contract, and accumulates for each year the annuity is invested and accruing.  This ‘Income Account Value’ and the ‘Payout Rate’ is how the insurance company calculates your lifetime income when you turn on the income option.

The income account may be phrased as an ‘income account’, ‘benefits base’, or other terms.  Acronyms are usually IAV and BB.  We’ll use ‘income account’ through this report.

Account Value Vs Income Account Value

A key element to clarify in our discussion of hybrid annuities is the difference between your actual account value, as opposed to your income account value.

These are two very different things that are frequently confused by investors and advisors alike.

If anyone is telling you that a hybrid annuity they are selling is ‘guaranteed to go up by 7% per year’ they are flat out lying to you.  Let this tripwire be your gauge of the integrity of any sales person you encounter- if they mess this one up, what else do they not understand?

If you want, go back to the Benefits Of Hybrid Annuities page where I gave a marketing focused description of a Hybrid Annuity.  Reading carefully, it may seem like the annuity account grows at 7% per year, but that is not what it actually says.  It’s the Income Account that ‘Rolls Up’ at 7% per year.

The account value is YOUR money- real dollars that may appreciate (or lose value, in the case of a Variable Annuity).  That’s the core of the annuity as an investment product.

An Income Account Value is NOT real dollars.  It’s just a number that the insurance company uses to calculate future payout rates from. It’s the bridge between the investment, and the income insurance.

Income Rider Fees

The income Rider on a typical Index Annuity incurs an annual fee of ranging among carriers between .75% and 1% of the account value per year.  Compare this to the fees in Variable Annuities, averaging 3% to 5%, and this lifetime income option is a good value.

Index annuities marketed as lifetime income products with this rider may have lower caps and participation rates, however.  Be sure to know your goals going in- if you are looking for safe appreciation only, without the lifetime income, it may be more lucrative to buy an index annuity with higher caps and participation that does not offer a lifetime income rider.

Rollup Rate: How An Income Account Value Works

Income accounts generally start with the same value as your premium investment.  If you invest $100,000 at the start, your Income Account will also start with 100,000.  Notice, there is no “$” in front of this number. Companies may also use a Bonus that will add to your Income Account at the contract start.  More on the bonus in just a moment.

With a $100,000 investment, just the Income Account calculation rolling up at 8% per year would look like this:

Hybrid Annuity Income Account Rider

Hybrid Annuity Income Account Rider

Bonus Rate

Some companies additionally offer a ‘Bonus’ on new accounts.  It varies from company to company, but usually, the bonus is credited to your Income Account Value.  For example, a $100,000 investment in a contract with a 10% bonus would have an Income account value of 110,000 on day one.  This 110,000 would grow by the rollup rate each year.  Using the table above with a 10% bonus, it would look like this:

Hybrid Income Annuity Income Account With Bonus

Hybrid Income Annuity Income Account With Bonus

Payout Rate:

The payout rate is an aged based percentage of the Income Account Value that determines your lifetime income amount.  In most contracts, once you start taking income, the rollup of the Income Account stops.

Some companies allow you to start and stop income a few times, and reinstitute the rollup when you are not taking income, but this is not available in all contracts.

In the chart below, I show the rollup rate from above, an aged based Payout Rate that gets better the older you get, and the corresponding annual income amount.  You could commence a lifetime income of the amount in the right hand column in any year, but once you start, the rollup stops.

Your payout rate will vary depending on the carrier and your current age.  Below is just for illustration purposes.

Hybrid Annuity Income Account Rider With Payout Rate

Hybrid Annuity Income Account Rider With Payout Rate

Hybrid Annuity Complete Table

Now, to tie it all together we have the following table.  It shows the rates described above and how they all fit together.

hybrid annuity illustration

hybrid annuity illustration

In the table above the colored columns indicate the different riders. This is where all the confusion starts but I’m going to make it as simple as possible… you will only get the value of ONE of these columns.

Notice that the Income Account Value column is not highlighted and has no dollar sign. You WILL NOT receive that in a lump sum or in any other way because it is not your money. It is simply an amount used by the insurance company to calculate the lifetime income amount shown two columns to the right.

If what you just read seems contrary to what someone else is telling you, then stop talking to that person because they are lying to you.

Here are the basics of what you can expect:

  • If you decide to cancel the contract, you’ll get the account value less any surrender charges.
  • If you die, your heirs will receive the death benefit.
  • If you take the lifetime income benefit, you will receive the scheduled payment annually for life.
  • If you qualify for long-term care, you will receive the indicated boost in lifetime income.

Of course, we’re ready to assist you picking the best contract for your needs.  Simply give us a call.

To Get Started With Us Call 800-438-5121

Understand The Pros and Cons of Hybrid Annuities

The Pros and cons of Hybrid Annuities

The Pros and Cons of Hybrid Annuities

Like all annuities, there are pros and cons of hybrid annuities.  Remember, a ‘Hybrid Annuity’ is just a fixed index annuity with additional add- on riders.

So in looking at the pros and cons of these hybrid annuities, be sure you actually NEED all the benefits these contracts offer.  Nothing comes for free, and why pay for something you don’t need?

(This is the main message of the FREE AST Flex Strategy videos, so check it out!)

Pros and Cons Of Hybrid Annuities- The Positives

First, the pros: Hybrid Annuities offer a unique combination of benefits that accomplish many typical objectives in retirement income planning:

  1. Hybrid annuities offer partial market participation
  2. As with all fixed index annuities, there is no risk of loss to principal
  3. With guaranteed lifetime income riders, you have lifetime income
  4. As with all annuities, there is the potential for liquidity through withdrawals
  5. Unlike variable annuities, one of the main positive qualities of hybrid annuities is that they come with very low fees
  6. Finally, another pro to hybrid annuities is additional Long Term Care and Enhanced Death Benefit options

This really is a wide range of benefits rolled into one product.  For many people, it’s just perfect.  Lets look in a bit more detail at the pros….

Lifetime Income- This is reason #1 people are considering Hybrid Annuities.  Securing sufficient income for life is key to optimizing your assets.  Hybrid annuities are one way of achieving lifetime income.

Principle Guarantee- As with an Index Annuity, your initial investment has no risk of loss and may even be guaranteed to grow at a minimum rate.  The contract will state the minimum amount you can expect to receive at the end of the surrender period.

Tax Deferral– Like other annuities, the principal grows on a tax-deferred basis.

Reset Points Lock In Gains – Depending on the crediting method in your contract, reset dates may lock in gains that subsequently erode in the marketplace.  Timing is everything, but we have seen index annuities outperform markets due to the reset dates.

Charles Darwin

“The mule always appears to me a most surprising animal. That a hybrid should possess more reason, memory, obstinacy, social affection, powers of muscular endurance, and length of life, than either of its parents, seems to indicate that art has here outdone nature.

Charles Darwin

Now: The Problems With Hybrid Annuities

It’s critical to take a moment to investigate both the pros and the cons of the hybrid annuity.  As with anything, there are downsides to be aware of.

Income- You’re right, we listed this a one of the benefits of hybrid annuities too, however often we find that using an income rider on an index annuity is not the most efficient way to secure guaranteed income.

Complexity: Cap Rates, Participation Rates, Crediting Methods, Spreads:

All index annuities have a learning curve to overcome and hybrid annuities are no exception.  It can sometimes be hard to individuals to see the benefits when grappling with unfamiliar terms and calculations.

But, lucky for you, we at Annuity Straight Talk have recorded a superb and concise index annuity training video– just sign up to the right and get started on your way to being an expert in no time.  If you can get over the hump and understand how it all works, they really do offer a lot of benefits.

Perception Issues: Income Rider Account Value Vs Real Acct Value:

Perhaps our biggest issue when discussing Pros and Cons of Hybrid Annuities is one of perception and deceptive marketing by others.

If someone is telling you an annuity they offer is guaranteed to go up by some rate, like 8% per year roll up, they are lying to you.  It’s deceptive marketing that gives these products a bad name.

Rather, the Income Account Value may be guaranteed to roll up at 8%… but that is not real money you could walk away with.  If you don’t understand this concept yet, be sure to sign up and get our Hybrid Annuity Product Detail Report , and also, read up on Income Riders.

Final Negative: Long Surrender Periods- Hybrid annuities with lifetime income riders should be approached as a one way investment that you don’t plan to surrender.  You should consider the money invested as a permanent investment in a future lifetime income stream.  With that mindset, the long surrender is a non-issue, however if circumstances change, you should be aware that early surrender could be costly.

Hybrid Annuities: Pros And Cons Summary

How does it stack up for you with the Pros and Cons of Hybrid Annuities? Does the cap, participation, spread, and crediting method boggle the mind, or are you fine with the partial participation and  see the benefit in downside protection?

Feel free to explore the rest of these pages on Hybrid Annuities, but sometimes it’s best to just give us a call to go over your situation.  If you seek a qualified adviser well versed in Hybrid Annuities, please do not hesitate to contact us.

How The Rich Play The Market- New WSJ Article

feature-box-goldA new article in the Wall Street Journal caught my eye.  “How The Rich Play The Market” is a fresh reminder that human nature is just that- human.

The ‘Rich’ don’t necessarily have any secrets, better will, stronger nerve, or more skills.  In fact, even the ‘Super Rich’ suffer from the same impulses and trading habits as everyone else.  They may simply have more resources and be able to recover faster.

These households, with an average net worth of roughly $90 million, invest intelligently, for the most part, spreading their bets widely, seldom trading and keeping their investing taxes to a minimum.

But the superrich also commit rookie mistakes. Their approach to diversification might not always be ideal. They chase investment fads like people chasing Audi A3 deals. They freeze with fear just when bravery is most likely to be rewarded. Maybe the “smart money” isn’t so different from the middle-class “dumb money” that Wall Street likes to mock.

The last paragraph of the article, which appears Here, really says it all.

You’re better off doing what Wall Street can’t: cultivating patience, trading as seldom as possible, focusing only on those rare companies where you might know something everyone else doesn’t and, finally, rebalancing when it is hardest.

Right now, that might mean trimming stocks a bit just as other people are most tempted to add to them.

So how best to lock in gains? Consider annuities.  A Fixed Index Annuity offers some attractive options, chief among them a guaranteed floor that protects you from losses.

Other options which move more to the Hybrid Annuity category, include

  • Return of premium
  • Partial liquidity ( i.e. 10% free withdrawals, nursing home and terminal illness waivers, income)
  • Lifetime Income annuitization options
  • Additional cost of living increases, LTC type enhancements and death benefit enhancements with NO UNDERWRITING… if need be.

Index Annuities are an excellent way to lock in gains, protect from losses, yet still participate in some of the market upside.  If you’ve had a good strong run, re-balancing out of riskier positions just makes sense.