What Is a Hybrid Annuity?
Hello there. Stan The Annuity Man, America's annuity agent here with you, and today's topic is a good one. We will dive into what a Hybrid Annuity is and give some examples. Typically, when people say, "What's a hybrid?" I say, "Well, it's a mattress, a car, a plant." But in today's annuity selling environment, people are starting to make up words to sell annuities. Instead of calling the annuities what they are, they say, "Hey, buy my hybrid annuity." In essence, to answer that question in a short form, I'm going to go into the longer form later, so hang in there with me. A hybrid annuity is typically attached to a sales pitch for a Fixed Index Annuity. So, the question is, why are they using the word hybrid? Hang in there with me because Stan knows, and I'm getting ready to tell you.
Someone called me the other day, and they said, "Stan, what's the best hybrid annuity out there?" Or "What's the best hybrid?" Actually, they didn't say annuity. They said, "What's the best hybrid?" Anyone that asks me that, I'll say, "Toyota right now, but Honda's really close." I hate it when the industry or agents use words to polish up a contract. When they start saying the word hybrid, they're saying Indexed Annuity in most cases. So, what is an Indexed Annuity? Let's go over that quickly, and then I'll go to the beloved whiteboard and draw it out so you can understand what they're saying.
Hybrid annuity, Fixed Indexed Annuity is really what it is. It's a Fixed Annuity that returns CD-type rates, even though that's not what you're going to hear. You're going to hear market upside with no downside, and you're going to hear market participation with principal protection. Only half of that's true. There's full principal protection, but Indexed Annuities were developed in 1995 to compete with CD returns, and that's what they do. Now in my world, I typically use Indexed Annuities as a delivery system for an Income Rider, an income benefit.
Let's dive deeper into why agents and advisors use the word hybrid and why you should filter that out. And when they say it, you're going to say, "I understand why they are saying that." So, hang in there with me.
All right, here we go. So, hybrid, when they say the word hybrid, to me, they're saying multiple benefits, but if that's the case, then every annuity out there type has multiple benefits. An Immediate Annuity could have multiple benefits, so that could be a hybrid, but that's not how they use it. They're saying this and saying, "Here is your Fixed Index Annuity," which is a CD product. Oh, by the way, that's what it's been termed since 1995. But they're saying, "You're going to get a return," and they're saying market return. I'm saying this because I'm a realist, and I understand this, and I'm Stan The Annuity Man, America's annuity agent and number one guy out here. I understand these products and have written a book on this.
So, you have your CD-type returns, and then they're saying you get an income benefit, a separate account that you can use for future income. And it's at some high percentage that makes you think that Jimmy Carter's in office, and he's not in office; he's building homes. There's no high-interest rate. And then they'll say, "So you get CD-type returns and income benefits." And then the third thing you get is what's called confinement care benefits, which many people mistakenly say long-term care, and that's a little bit more income if you get sicker. In essence, you get your money back quicker when you get sicker. Remember that. With all this being said, they're saying, "It does a lot of things, so let's call it a hybrid." I don't know how that works, but hybrid means multiple benefits, but just understand that all annuities have multiple benefits.
For instance, a Multi-Year Guaranteed Annuity, or Fixed Rate Annuity, has multiple benefits. It gives you principal protection, no annual fees, and a guaranteed interest rate for the rest of your life. Single Premium, Immediate Annuity in a hybrid world. From the standpoint of our lifetime income stream and principal protection, we can structure it so that all of the money will go to either you or your family if you die early, even though the annuity company's on the hook to pay you for the rest of your life. You can also attach a COLA, a Cost-of-Living Adjustment, and multiple benefits. So, hybrid, it's a car, a plant, a mattress, but when people start to use it to sell annuities, they say, "Hey, stop with the hybrid nonsense. What type of annuity are you talking about?"
Does It Make Sense?
Let's play their silly game of calling it a hybrid. When would the quote, multiple benefit annuity, aka hybrid in their world, when does that make sense? Let's look at the Indexed Annuity, which is most likely what they're pitching, and how that might make sense to you. In a hybrid world, it means multiple benefits. What are the multiple benefits you could get from this type of product?
Number one is principal protection. Number two, you can get an Income Rider attached to it, a future income benefit you can structure to pay for the rest of your life. The third thing, from a multiple benefits standpoint, is you could get a confinement care benefit rider attached to your Income Benefit Rider. Many have different formulas on how it increases, but when you get sicker, they'll increase the income stream based on two of the six daily functions.
Some of them are like that. Other ones have different parameters that you have to meet for them to increase the income stream. But it's a guaranteed issue benefit so that you can get principal protection, an income benefit, and a confinement care benefit. And then some of them will have number four. Look at it; the principal protection comes with CD-type returns. And I know that when you're at the bad chicken dinner seminar, and the guy says hybrid, they're talking about market-type returns. It just doesn't work that way. The planets don't align themselves that way historically. One year or so, you might get a better return than a CD, but overall, an Indexed Annuity, which they're calling a hybrid, has been more of a CD-type product since 1995.
But where does it fit? Where does a multiple-benefit annuity fit? It fits here when you need these types of things. Principal protection income, possibly confinement care, and then CD-type returns that lock in every year and don't go down; that's a good thing. So, if you're looking for multiple benefits, this may be the way to go. Variable Annuities have a similar type of multiple benefits as well. Don't fall for the pitch. As I always tell people, there are no perfect answers to annuities, just bad sales pitches. These are contracts, so understand what the contract says and what the annuity is going to do. Own an annuity for what it will do, not what it might do, and not the back-tested, hypothetical, theoretical, projected, hopeful agent return scenarios you always see. Own it for these multiple benefit scenarios that are contractually in the policy. Remember that.
I am the number one guy out here and for a reason. I'm brutally factual about these products. I feel where you're at because you're getting hit with all these sales messages. Your advisor's telling you this, and you go to the bad chicken dinner seminar, and they're telling you this. You see some ad on the radio or TV or something like that that sounds too good to be true. I understand. Just remember this, which is very important, if it sounds too good to be true, it is, every single time with annuities. Period, no exceptions. If you can understand that when you hear the pitch, you'll come out ahead because you won't fall for the dream. You won't fall for the unicorns chasing the butterflies.
The other thing that I would tell you to do, and maybe your only protection that you have, is if someone's pitching you something, write down exactly what they say to you the way that you understand it. Write it down in detail. Sign and date it at the bottom. Flip that page around and have them sign it, whoever pitched that to you. Two things are going to happen. Either that pen is going to weigh 1,000 pounds, or they're going to sign it and own it, and then you've got them, in essence, which is not good, but there's a lot of people out there selling the sizzle, not the steak. That's what I would tell you to do. Just be careful out there.
I have done another video, How Does a Fixed Index Annuity Work?. I go into the details without using the word hybrid, and I encourage you to look at that. If you want to see an Indexed Annuity type quote with an Income Rider, we can do that. Go to our annuity calculators, and check out the quotes yourself.
Please subscribe to my YouTube channel. I'm putting videos out every single day, Monday through Friday, to educate the public so that they understand how these contracts, and yes, I did say contracts, i.e., annuities work. See you next time.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.