For many years, retirement planners have used annuities to provide deferred tax growth and guaranteed income. But one of the biggest blows to these products by most critics is that they are not liquid instruments. Contract owners usually need to keep most of their funds in the contract for at least 5 to 20 years, depending on the operator and product.
Therefore, annuity operators have created an alternative form of contract, called a hybrid annuity, whose structure is designed to provide growth and income to their investors. In fact, these vehicles can be used for many purposes, but the question is, can they actually perform each of these functions?
How a mixed annuity works
As the name suggests, a mixed annuity is just a combination of two or more basic annuity contracts. Most products combine fixed and variable annuity contracts, which are located in the same chassis. Those with variable annuities in a section aim to allow a portion of the client’s funds to grow in the mutual fund sub-account section of the contract, while at the same time providing a guaranteed income that the client cannot live longer on the fixed side.
Other types of hybrid contracts pair fixed annuities with index products to provide complete principal guarantees for the two parts. Like all other types of annuities, they can be immediate or deferred, with fixed or flexible premiums. They can also include a range of standards for other annuity features that are generally provided today, including life and death benefit additional clauses and accelerated payment of chronic diseases or long-term care costs.
There are also hybrid contracts designed for charity funds or longevity contracts. These contracts have no cash value and will not be paid before the client reaches an advanced age. And, of course, they also provide tax deferred growth and a range of payment options for those who choose to annuitize their contracts.
Who should use them
Although there is no absolute definition of who should own a mixed annuity, they are usually best for retirement savers looking for a combination of growth and income. Those who are more inclined to get an income stream that can keep up with inflation over time may also want to look at these tools. The amount of risk they are willing to take in terms of growth will determine whether they should use products with variable or index segments.
Some consultants said that they would not use these products for younger clients, because those who are still decades away from retirement may succeed by investing directly in long-term stocks.
Customers who have reached retirement age may not be good candidates for these products, because they may not have the opportunity to fully profit from the growth. For them, a simple instant annuity contract may provide better payment without risk to the principal. However, customers who have a more sophisticated and thorough understanding of how annuities work may be suitable for any age, although the same restrictions may also apply to them.
Pros and cons
In addition to the standard features of other types of annuities, mixed annuities also provide customers with some major benefits. Their dual nature can provide customers with a guaranteed increase in income, because the growth part provides them with a hedge against inflation. Contracts that combine fixed and variable annuities can also provide customers with lower downside risks than using variable annuities alone, because the fixed portion will continue to be paid regardless of the performance of the variable sub-account.
Over-designed and over-expensive?
However, although mixed annuities claim to be a one-shot spectacle that can do almost anything, many critics believe that they are over-designed and too expensive. The dual-chassis model makes these products particularly complex, and many customers cannot understand all their technical features or limitations. Many planners also advertise that these vehicles are a universal product that can meet the needs of everyone.
This is of course not true, but a large number of potential customers cannot see this-which means that a large part of the hundreds of millions of dollars invested in these products each year is likely to be misled.
Many hybrid products also come with extremely high fees and back-end surrender fee schedules, which customers may not see clearly at the time of purchase. They also often pay too high commissions to planners, which can easily affect them to show these products to customers instead of other more suitable products.
Not what they claim?
The final criticism of many authorities on these products is that they are not what they claim to be. The term “hybrid” was coined a few years ago by the marketing department of the insurance industry to capitalize on the recent success of hybrid motor sports. But any type of annuity can provide growth and income in some way, because almost all variable and index annuity products today come with guaranteed income additional clauses and other features, allowing investors to lock in the guaranteed income stream and still enjoy some kind of The form of upside potential.
Nevertheless, the hybrid annuity can still pack two complete annuity contracts into one product, which can basically perform two different functions at the same time.
Although mixed annuities are the fastest growing part of the annuity industry since the Great Depression, to many skeptics, their true value has not been proven. Their ability to combine two complete products into one car is their biggest selling point, but whether the jury can really provide benefits that traditional similar products can’t match is still inconclusive.
For more information about mixed annuities, please visit AnnuityFYI on www.annuityfyi.com or consult your financial advisor.