A lot of people either leave their money sitting in low-interest savings accounts or take on too much risk with investments they don’t fully understand. Neither option feels great—one doesn’t grow much, and the other can keep you up at night. And without a solid middle ground, planning for the future can feel more stressful than secure. That’s why investing in a hybrid annuity can be a better option.
According to LIMRA, the annuity industry saw three consecutive years of record-breaking sales from 2022 to 2024, totaling over $1.1 trillion—an increase of 85% over the historical average.
That kind of momentum is why you should consider a hybrid annuity. If you’re wondering whether it might be a good fit for your own goals, you’re in the right place. This guide will walk you through what it is, how it works, and what to consider before deciding if it’s the right move for you.
What Is a Hybrid Annuity?
A hybrid annuity is a type of financial product that blends parts of both fixed and variable annuities. It gives you some of the steady growth that fixed annuities offer, along with a chance for more growth that comes with variable options.
The word “hybrid” just means it mixes two types into one. On one hand, part of your money grows at a fixed rate, so you know what to expect. On the other hand, another part can grow based on market performance, which gives you the chance to earn more, though it also comes with some risk.
People often choose hybrid annuities when they want a bit more flexibility. You get some protection for your money, while also keeping the door open for extra growth.
Let’s say you’re in your early 50s and want to start preparing for retirement. You don’t want to take significant risks with your money, but you also don’t want it just to sit there. This is where a hybrid annuity could give you the balance you need.
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Key Components of a Hybrid Annuity
The components of a hybrid annuity include:
Fixed Portion
The fixed portion gives you a guaranteed interest rate on part of your money. This means you know how much that part will grow over time. It doesn’t change when the market goes up or down. This helps protect your savings and adds a sense of stability. Even when the stock market drops, the fixed portion stays on track and keeps growing at the rate promised when you signed up.
Variable Portion
The variable portion is tied to how the market performs. In most cases, this means your returns follow a stock market index, like the S&P 500 by S&P Global. This part gives you a chance to grow your money faster, but it can also go through ups and downs. It doesn’t directly invest in the stock market, but it does follow it. That means when the market does well, your returns might be higher. When it does poorly, your growth may slow down or stop for a while. Some plans also set a limit on how much you can gain or lose each year, which helps manage the risk.
Income Rider (Optional)
An income rider is something you can add to the annuity, often for an extra fee. It’s made to give you regular payments for the rest of your life, even if your original money runs out. This helps people who want to make sure they keep getting paid during retirement. Most income riders have rules about when you can start receiving payments and how much you’ll get. The amount usually grows over time if you wait to take it. Some riders also include benefits for your spouse, so payments continue after one person passes away.
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How Does a Hybrid Annuity Work?
A hybrid annuity moves through a few clear steps. Each stage plays a role in how your money grows and how you later receive income from it.
Funding the Annuity
It starts when you put money into the annuity. This can be a one-time payment or a series of payments over time. Some people use savings, while others might move money from a retirement account. Once the money is in, the insurance company takes over and begins managing the annuity.
Accumulation Phase
This is the time when your money is growing. Part of it earns a fixed rate, while another part may grow based on how the market does. You usually don’t take money out during this time. The goal here is to let the annuity build up value so you can use it later.
Payout Phase
This is when you start receiving regular payments from the annuity. You can often choose when to begin, and how often you want to get paid—monthly, quarterly, or yearly. Some people prefer to receive payments for a certain number of years, while others choose a plan that pays for life.
Running the Annuity
Insurance companies run the annuities. They manage where the money goes, track growth, and handle payments. They also take on the risk, especially when a lifetime income option is added. Their job is to make sure the contract is followed and that payments go out as promised.
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Types of Hybrid Annuities
Hybrid annuities have different types and features. Here’s how they work:
Fixed Hybrid Annuity
Fixed annuities are known for being low-risk and predictable, making them appealing if you don’t want surprises with your money. When you sign up, you lock in an interest rate that stays the same for the entire contract. So even if the stock market fluctuates, your returns remain steady and reliable.
Suppose you’re five years from retirement and tired of watching your 401(k) bounce up and down. A fixed annuity can help you know exactly how much income you’ll get monthly. Or maybe your parents are already retired and want something safer than stocks to protect their savings. Fixed annuities are often the go-to in that stage of life.
There are two types of fixed annuities: Multi-Year Guaranteed and Single Premium Immediate.
Multi-Year Guaranteed Annuity (MYGA)
Multi-Year Guaranteed Annuity (MYGA) gives you a fixed interest rate for a set period, usually between three and ten years. This hybrid annuity is similar to a certificate of deposit (CD), but often with better rates and some added perks.
Lately, MYGAs have gained more attention because their returns frequently beat what traditional CDs offer.
For example, if you want a safe place to grow your money without paying taxes on the interest right away, you can opt for a MYGA. It lets you plan ahead by knowing how much you’ll earn during the term.
Single Premium Immediate Annuity (SPIA)
Another common type of fixed annuity is the Single Premium Immediate Annuity (SPIA). Sometimes called an income annuity, it starts paying you right after you make a one-time lump-sum payment. That money is then turned into a steady stream of income, which can last for life or a set number of years.
Let’s say you sell a house, receive an inheritance, or retire with a sizable 401(k). Instead of worrying about how long that money will last, a SPIA can turn it into guaranteed monthly payments.
You can also set it up so your spouse keeps getting payments after you’re gone, or name a non-spouse as a beneficiary for a fixed payout period.
Fixed Index Hybrid Annuity
A fixed index annuity ties your potential earnings to a market index. This hybrid annuity is appealing to investors because of the balance it provides. You can benefit from market growth without risking your original investment.
Even if the market is risky, your principal stays protected. However, your gains are usually capped, so if the market is soaring, you only get a portion of those returns.
Imagine you’re in your late 40s and starting to feel like your savings need a little boost, but you’re not ready to gamble. A fixed index annuity could give you some of that market-linked growth without losing your initial investment.
Variable Hybrid Annuity
Variable annuities are for those who are more comfortable taking on risk in exchange for higher growth potential. Instead of earning a fixed rate or being tied to one index, your money goes into mutual fund-like sub-account.
These accounts can change based on how the market performs. The upside is real growth, especially if the market does well over time. But if you’re looking for predictability or low risk, this may not be suitable for you.
Let’s say you’ve already built an emergency fund and some sinking funds. A variable annuity could be a way to grow your money. It usually makes sense if you’ve got time to recover from dips and want to actively invest a part of your retirement.
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Benefits of a Hybrid Annuity
Hybrid annuities appeal to many because they combine stability with the opportunity for moderate growth. For people approaching retirement, it’s often essential to find a place for their money that won’t waver with the market.
Typically Less Risky
Unlike stocks or mutual funds, hybrid annuities usually include safeguards that prevent your investment from dropping when the market takes a hit. Your account value might not shoot up overnight, but it also won’t dip after a bad quarter.
This safety net can relieve those who feel uneasy about the market’s unpredictability.
Especially if you’re closer to retirement and can’t afford to take big chances, having that kind of stability matters. When you’ve spent years building up savings, the last thing you want is to lose a large portion just because the market had a rough year.
Reliable Long-Term Income
Hybrid annuities are often chosen by people who want to turn their savings into a consistent long-term investment. Once your payments begin, you know exactly how much you’ll receive and when.
That sense of regularity is practical, especially after leaving the workforce. When paychecks stop, many people find comfort knowing they can count on a reliable monthly deposit.
Have Higher Rates Than Alternatives
Compared to traditional savings accounts or certificates of deposit, hybrid annuities often provide better long-term returns. While they’re not designed for short-term investments, they can still outperform many low-risk options. Over time, this slight difference in interest rates can significantly impact your total earnings.
Let’s say you’re considering where to put a portion of your retirement savings. A regular savings account might feel safe, but it may only offer a tiny return. A hybrid annuity, on the other hand, gives you that same sense of stability while allowing your money to grow.
Customizable
What makes hybrid annuities even more appealing is how flexible they can be. Depending on your needs, you can choose when to start receiving income, whether you want added benefits like long-term care coverage, or how much risk you’re willing to take on.
This ability to adjust the annuity to your situation makes it more like a tool built around your goals.
For example, someone in their 60s might want to start receiving income immediately, while someone younger may prefer to let their money grow first. You can also include features that support your family after you’re gone or protect you from specific financial risks.
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Disadvantages of a Hybrid Annuity
Hybrid annuities are not always as simple as they seem. Certain features that sound great upfront may come with limits or conditions. Taking the time to understand the following cons can help you avoid surprises down the road.
Rate Caps
Even when the market performs well, your return might be limited. This situation happens because many annuities include something called a rate cap.
For example, if the market index increases by 12%, you might only receive 6 or 7%, depending on your contract. That cap keeps the insurance company from taking on too much risk. This might be frustrating if you expect your investments to track closely with market gains.
Costly Fees
Hybrid annuities often come with a long list of fees, and they aren’t always easy to spot. These can include annual maintenance fees, charges for extra features (called riders), and penalties if you withdraw money early.
All of these costs can quietly reduce your total earnings, especially if you aren’t actively monitoring them.
Complex Documents
The paperwork for hybrid annuities can be challenging to understand, especially if you’re unfamiliar with financial jargon. Contracts often have dozens of pages and include a lot of fine print. Reading through it can feel like a legal textbook, making it easy to miss important details or misinterpret what you’re agreeing to.
Limited Fund Options
Hybrid annuities often restrict where your money can be invested. Compared to brokerage accounts or self-directed retirement plans, the selection of investment options is usually narrower.
That means you might not be able to choose the funds or indexes you prefer or fine-tune your portfolio as you could elsewhere.
This limit can feel restricting for someone who wants more control or has specific investment strategies in mind. You may have to work within the provider’s preset offerings, which can affect your ability to fully customize how your money is allocated.
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How to Choose the Right Hybrid Annuity
What do you want this money to do for you? Are you trying to create steady income, grow your savings over time, or cover future care costs?
Being clear on your purpose can help you determine which annuity features are worth your attention and which ones are unnecessary. So, here are a few tips:
Set Your Investment Goals
Start by asking yourself what you want the annuity to do. Is the goal to replace your paycheck during retirement? Or will you let it grow quietly for several years before touching it?
Your answer will shape everything else, including the type of hybrid annuity you choose and how you structure your payments.
This step helps you stay focused on what matters most to you. Without clear goals, it’s easy to be swayed by flashy benefits or sugarcoated add-ons that don’t actually align with your needs.
Analyze Your Risk Tolerance
Risk tolerance is about how comfortable you are with the idea of losing money in the short term. If you find yourself checking your investments every time the market moves or worrying about volatility, you may prefer an annuity with more protection and less exposure to market swings.
Meanwhile, if you have time before retirement and can stomach some fluctuations, you might be fine with a structure that includes more growth potential. Being honest with yourself here helps you avoid second-guessing your decision later.
Consider Your Time Horizon
Your time horizon is basically how long you have before you need to start using the money. If you won’t need income for 10 to 15 years, you might be able to choose an annuity with more growth-focused features. This extra time can help your investment build more value before you start drawing from it.
Compare Different Options
Hybrid annuities are unique and serve different purposes. Different companies offer different rates, fees, and features. Taking the time to compare various options can help you spot what’s valuable versus what’s just good marketing.
You wouldn’t buy the first car you test drive without seeing what else is out there. You can think about it in a similar way here. Gathering a few quotes and reading through the details can give you more confidence in your final choice.
Seek Expert Financial Advice
A financial advisor can help you sort through the fine print, compare products, and weigh the pros and cons based on your specific situation. Even if you feel confident in your understanding, it’s always helpful to have a second opinion from an expert.
Look for someone who is transparent about their pay and has experience with annuities to ensure the product fits your long-term financial goals without causing issues down the line.
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The Bottom Line
Hybrid annuities are a practical choice if you want stability and room for growth in your financial plan. With thorough research and expert guidance, you can protect your savings while planning ahead with confidence. You can even include it in your long-term retirement strategy.
If you’re still unsure where to start, subscribe to Financial Daily Update to get resources that will help you make sense of your choices.
