All Things Annuities Deferred Annuities

What is a Variable Index Annuity? aka “Hybrid” Annuities

Hybrid Annuity Overview, Variable Index Annuities
Hybrid Annuity Overview

Growth

Variable Index Annuities offers two different growth strategy options for you to choose from:

Variable Strategy

This option follows the same strategy as a basic variable annuity. As a recap, the contract value is directly invested in the market via sub-accounts which are essentially mutual funds. 

If the variable option is selected, the standard variable annuity fees will apply.

Index Strategy

This index strategy has similarities to the one found in basic Fixed Index Annuities because they both use crediting methods to calculate returns.

However, there are quite a few key differences that set this strategy apart from the ones found in traditional Fixed Index Annuities, such as:

  • Much Higher Cap Rates 
  • Longer crediting terms – 1, 3, and 6 years are the most common terms.
  • Interest accrues daily until the cap rate maxes out. 

Most importantly, you are not entirely sheltered from market volatility.

Moreover, even though you’re not directly invested in the market, you can still incur losses during a market downturn. Instead, the insurance company will offer a “buffer” rate or a “floor” rate to try and minimize market losses.


What is a Buffer Rate?

A buffer rate is a percentage of a loss that the insurance company will absorb during a market downturn. The contract owner absorbs any losses above the buffer rate.

Suppose you have a buffer rate of 20%, and a correction occurs, causing the market to go down by 30%. The insurance company realizes the 20% loss, and you take on the remaining 10%.


What is a Floor Rate?

A floor rate is the most the contract value can lose in one crediting term during a market downturn.

If your floor rate is 25%, then that is the most your contract value will lose during your crediting term in the event of a market down.


Annual Fees

Annual fees for Hybrid Annuities will depend on the selected growth strategy.

  • Variable Strategy: The Variable annuity fees listed below will apply for this option.

    • Mortality & Expense Fee
    • Administration Fee
    • Sub-account Fee

It seems very uncommon for contract owners to go this route. For example, out of the thousands of annuity contracts I analyzed, a few hundred were Variable Index Annuity contracts, and none were allocated in the variable strategy. 

  • Index Strategy: Annual fees typically don’t apply if the index strategy is selected unless a rider is added.

Insurance Aspects

  • Death Benefit: The “standard” death benefit for Hybrid Annuities is contract specific. Some Hybrid Annuities offer the same standard death benefit as Variable Annuities (the higher the contract value or the premiums paid, minus any withdrawals). Other Hybrid Annuities provide the same standard death benefit as Fixed Annuities (contract value only).
  • Income Benefit: Annuitization is required for the guaranteed income stream to take effect unless an income rider (living benefit rider) is purchased and added to the contract.
  • Available Riders: Living Benefit Riders (Income Riders), LTC Riders, and Principal Protection Riders.

Surrender Cost(s)

  • Surrender Schedule: Surrender schedules for Hybrid Annuities tend to be on the lower end of the spectrum compared to their peers. Schedules typically range anywhere from 3 years to 7 years. 

Final thoughts

Index Annuities


My personal experience with these contracts has mostly been positive. The Hybrid Annuity contracts I’ve reviewed often outperformed the Fixed Index Annuities I evaluated.

Additionally, contract owners that I came in contact with were also pretty knowledgeable on the mechanics of their contracts, which in my opinion, shows a healthy sales culture.

My only concern with these products is how the value is affected during a steep correction. In other words, how would an abrupt yet short-term loss affect the growth for the remaining term? 

Unfortunately, I got the answer to my question in May 2020.

I’m sure you remember there was a short-lived bear market that we experienced a couple of months prior in March of 2020, where the market was almost 40% down. Thankfully, it miraculously rebounded about a month later. 

However, as other investors witnessed the rebound quickly reflect in their traditional investment accounts; some Hybrid Annuity contracts struggled to recoup losses from that short-lived market downturn, mainly due to their applicable cap rates.

Limitations on losses and gains simultaneously are a terrible combination after such a market cycle. 


Disclaimer: The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or insurance product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.


Leave a Reply