Fixed annuities offer stability — a guaranteed income stream and protection from market volatility. But when interest rates are low, growth can be underwhelming. Variable annuities provide greater growth potential, but with additional market risk. 

For investors looking to balance security with growth, a hybrid annuity may offer just that. One portion of your investment is protected in a fixed annuity, while the other is in a variable annuity. This guide will unpack hybrid annuities, how they work, and what to consider before investing.

What is a hybrid annuity?

Technically, a hybrid annuity with an insurance company isn’t a type of annuity. It's a hybrid financial approach that blends two types of annuity — fixed annuities and variable (or indexed) annuities. 

• Fixed: A fixed annuity has a set interest rate, maturity, and compounding period. You’ll always know the exact cash value at any given time. 
• Variable: A variable annuity is linked to the performance of underlying investment options. If the market performs well, the value increases, but poor market performance can reduce your returns and negatively impact your principal investment. 

Together, these components can offer both the steady income and security of a fixed annuity and the potential growth of a variable one. 

For retirees seeking a guaranteed income stream right away, a hybrid SPIA (single premium immediate annuity) could be a good option. It allows you to convert a lump sum into a hybrid annuity with immediate disbursements. If you’re over 59½ and want a guaranteed income stream to supplement Social Security, this may be a strategic solution. 

How does a hybrid annuity work?

A hybrid annuity combines two types of annuities. Read on for an example of how this works in practice.

Fixed annuity portion

Say you contribute $100,000 in a hybrid annuity. $60,000 goes into a fixed annuity that guarantees a 3% annual interest. That means you’ll accrue $1,800 after the first year, and slightly more each year due to compounding, until the accumulation phase of the annuity ends. Even if the market crashes, you still receive this interest. 

The variable portion

The remaining $40,000 of your initial contribution is investedis in a variable annuity and the performance is tied to the underlying sub-accounts you invest in. If the market goes up, and your sub-accounts perform well, your account value can increase, but if the market performs poorly and so do your sub-accounts, your account value will be reduced. 

Combining the fixed and variable portions

Remember that your variable return can be negative, wiping out part of your gains and even some of your principal. The fixed portion of your hybrid annuity is insulated from market swings, but the variable side is not.

Since fixed annuities provide principal protection, this can help limit losses in the variable portion — an important feature for conservative investors. 

Pros and cons of hybrid annuity structure

Hybrid annuities offer a unique combination of security and growth potential, but they aren’t the right fit for every investor. Understanding the advantages and disadvantages is key to making an informed decision. Here’s a breakdown of the main pros and cons.

Pros of hybrid annuities

Lifetime income guarantee from the fixed portion

The fixed portion comes with a reliable income stream, often for life, creating a stable foundation. While the variable annuity cash value isn’t guaranteed, it can supplement your guaranteed income during strong market periods.

Growth potential from the variable portion

A hybrid annuity  structure offer the opportunity for higher returns compared to a traditional fixed annuity. If the market performs well, the variable annuity value may generate meaningful gains and increase your overall return. 

Lower downside risk vs. full variable annuities

Unlike a standard variable annuity, a hybrid annuity structure can help protect a portion of your investment. The fixed annuity portion is shielded from market volatility, helping you avoid significant losses during downturns.

Customization options for risk tolerance

Hybrid annuity structures can allow a great deal of flexibility. As an investor, you can choose how to allocate your funds based on different interest rates available with fixed annuities and sub-account elections in the variable annuity, tailoring the risk level to your financial goals. 

Cons of hybrid annuities

Complex contracts and fee structures

Because hybrid annuity structures involve purchasing two different annuity products, it can be challenging for  inexperienced investors to find the proper mix of safety and growth potential. Contracts often include layered fee structures and rider options. Review the terms carefully, check for hidden fees, and consult a financial advisor before committing. 

Lower growth potential than standalone variable products

With a standalone variable annuity, 100% of your funds are allocated to sub-account performance, offering higher potential returns. By comparison, only a portion of  your funds in a hybrid annuity structure benefits from market gains, which limits your upside. 

Surrender charges and liquidity issues

Like most annuities, hybrids often come with surrender charges for early withdrawals. You may also face a 10% IRS early withdrawal tax penalties if you withdraw funds before age 59½. If access to your money is important, this may not be the right structure for you.

How Gainbridge fits into your annuity strategy

Gainbridge offers a range of digital annuities designed to support a balanced retirement strategy. Whether you’re seeking guaranteed income, flexibility, or protection against market volatility, our products can help support your goals.

ParityFlex™ is a flexible premium annuity, allowing you to make deposits over time instead of a single lump sum. It also provides penalty-free annual withdrawals of up to 10%, offering both growth and liquidity. SteadyPace™ is a single premium annuity that delivers predictable growth over a set term. 

Simplify investing with Gainbridge

If you seek quality  choices, transparent terms, and investing flexibility, visit Gainbridge’s innovative platform and skip the middleman. We offer a 30-day free look period during which you can sell your annuity back to us for a full refund. 

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This article is for informational purposes only and is not intended to provide investment, tax, or legal advice. You should consult your own advisor for tailored advice.

Annuities issued by Gainbridge Life Insurance Company located in Zionsville, Indiana.

Guarantees are based on the financial strength and claims paying ability of the issuing insurance company. Annuities have terms and requirements for keeping them in force, you should read contract details carefully before electing to purchase an annuity. Annuities are meant for long term investment and not intended to meet short term liquidity needs prior to the end of the contract term. Withdrawals are subject to surrender penalties and market value adjustments and reduce cash value and retirement savings.