Where Do Hybrid Annuities Fit?

By Linda Koco
AnnuityNews

The arrival of hybrid annuities into the marketplace is causing some head scratching in the advisor ranks. Because the policies blend characteristics of variable annuities with those of fixed index annuities, the question is: how to position the products with clients?

Kelley Connelly, an investment advisor representative who focuses on annuities at JHS Capital Advisors in Sebring, Florida, has been thinking about this as she reads through the product literature and specifications.

To date, four carriers are selling the products — AXA Equitable, Allianz, MetLife and CUNA Mutual Group. The designs differ quite a bit but, in general, they walk and talk like a variable annuity due to offering upside potential through two or more investment options. In addition, they resemble indexed annuities because of most or all of the options link their gains to an index. On top of that, the products offer either a downside guarantee or a downside buffer, either of which limits loss of principal anywhere from zero to some percentage, depending on the products. All are registered products, sold by prospectus. None offers a living benefit guarantee.

The products go by different names -- registered indexed annuities, variable indexed annuities, hybrids, etc. LIMRA Secure Retirement Institute is classifying them as “structured annuities.”

Connelly said she has begun to think of the policies as akin to a conservatively-designed “structured product.” (A structured product is a package of equity and fixed-income investments that are “structured” in a way to provide upside potential with downside protection. They typically have a maturity date, and some may link investment performance to an index.)

But the hybrid policies are annuities, she said. “They have great tax deferral, a death benefit, 1035 exchange opportunity, withdrawal provisions, and income features too.”

The combination of features is making her think she might recommend then in situations where she may previously have recommended a conservative structured product.

The possibilities

One possibility is that “they would be good for a three- to five-year period when the market is in transition and the economy is rebuilding,” she said.

This is a “sleep at night” product, she explained. It offers the potential to earn more money than, say, a bank certificate of deposit or a money market account, and the index options give the client some flexibility in how much downside risk there will be. Those features, plus the other annuity features, make it attractive for the conservative buyer, she said.

Connelly likes that the products have different investment options or buckets. A client could put 50 percent of the premium into two protected buckets, for instance. Or a client could put, say, 25 percent into a bucket with a 10 percent downside risk, and 25 percent into three other buckets with lower downside risks and higher upside potential. At least one of the products has a fixed account too. “You can do whatever mix the person wants,” she said.

Regardless of the options chosen, “the client knows that a portion of the money will be protected from loss, and that there is an opportunity for the account value to grow,” Connelly said.</p>

People with conservative risk tolerance have their eye on the downside. If only some of the money is in a bucket which limits the downside to 25 percent and the other money is in buckets with less of a downside or zero downside, the person knows the total account value won’t drop 25 percent overall, she said.

In the conservative person’s eyes, that compares favorably to money invested in a traditional variable annuity or in a retail mutual fund.

“For a client who needs guaranteed retirement income, I might recommend using this product in combination with another annuity that provides a guaranteed living benefit rider,” she added. This would provide structured-like growth potential from the former and plus a guaranteed income stream from the latter.

For clients who want their principal back, she might use this product for that chunk of the money, choosing the bucket that guarantees no loss. The upside potential will be less than if the money goes into buckets with greater potential risk of loss. However, the potential for gain will still be there and the client can typically move money between buckets should preferences change.

“The amount of funds deposited into the two products would depend on the client’s assets in the rest of the portfolio and on the income need,” Connelly said. In no case would she put all the client’s money into annuities, she emphasized.

“Depending on what the client is trying to accomplish, I might put only 25 percent of the assets into the hybrid annuity. We might invest the remaining 75 percent in growth and income funds, or maybe put 50 percent into a balanced fund and the last 25 percent into a variable annuity with a living benefit rider.”

Here is a new type of annuity

When presenting the product to clients, Connelly said she begins by saying, “Here is a new version of annuities and this is how it works.”

She does provide definitions of fixed, variable and indexed annuities. Then she talks about how features from each can be combined to look like a structured product (if the client is familiar with that term) or a hybrid (if the client knows the term).

Because there is no living benefit guarantee, she said she finds the product easier to explain than variable annuities with living benefit guarantees. She also finds the products to be easier for clients to understand than fixed index annuities with their caps and participation rates.

Her preference is to position the hybrid as a “complement” to the main investments, not the centerpiece.

But the hybrid approach is definitely a plus, she added. “History has shown that no one knows what the market will do.” So the hybrid can be bulwark in the portfolio.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].