Registered Index-Linked Annuities
Registered index-linked annuities, commonly called RILAs, combine market-linked return potential with defined limits on both upside and downside. They can provide more growth potential than some traditional insurance products, but investors can still lose money.
What is a RILA?
A registered index-linked annuity is an insurance contract whose investment return is linked to the performance of one or more market indexes, subject to contractual limits.
Unlike a traditional variable annuity, the investor usually does not participate directly in the full gain or loss of the underlying index. Instead, the contract establishes parameters such as a buffer, floor, cap or participation rate.
Because RILAs are securities, they are generally offered through a prospectus and are subject to securities regulation.
How downside protection works
Buffer
A buffer absorbs a specified portion of a market decline before the investor participates in losses.
For example, a 10% buffer could absorb the first 10 percentage points of a decline during the applicable crediting period.
Floor
A floor generally limits the maximum loss that can be applied to a segment.
For example, a contract with a -10% floor may limit the segment loss to 10%, even if the reference index falls substantially more.
Suppose a hypothetical RILA segment has a 20% buffer. If the index declines 12%, the buffer could absorb the full decline for that segment. If the index declines 30%, the investor could experience approximately a 10% segment loss, before considering other contract provisions. Actual results depend entirely on the terms of the specific contract.
How upside participation works
Caps
A cap limits the maximum return credited during a specified period. If an index rises 18% but the applicable cap is 12%, the credited return would generally be limited to 12%, subject to the contract's terms.
Participation rates
Some contracts use a participation rate instead of, or in addition to, a cap. A 75% participation rate would generally credit 75% of the applicable index gain, subject to other contract terms.
Crediting periods
RILA segments may operate over periods such as one year, several years or another period established by the contract. The protection level and upside potential may differ among available strategies and crediting periods.
Potential advantages
- Defined limits on certain market losses.
- Market-linked growth potential.
- Potentially greater upside than some more conservative insurance products.
- Tax-deferred accumulation within nonqualified contracts.
- Ability to select among different protection and growth combinations.
- Potential retirement-income features, depending on the contract.
Important risks and limitations
You can lose money
A RILA is not the same as a fixed annuity. If market losses exceed the contractual protection level, the account or segment value can decline.
Upside is usually limited
Caps, participation rates or other formulas may prevent an investor from receiving the full return of a rising market.
Liquidity restrictions
Many contracts contain surrender periods or limits on withdrawals. A withdrawal may also affect contract guarantees or protection features.
Contract terms can change
Certain rates or terms used for new segments may be reset by the insurer within contractual limits.
Complexity
RILAs may contain multiple strategies, crediting periods, caps, buffers, floors and optional riders. Investors should understand how each component works.
RILA vs. other annuity types
| Feature | Fixed Indexed Annuity | RILA | Variable Annuity |
|---|---|---|---|
| Market-linked growth | Yes, through an interest-crediting formula | Yes | Yes |
| Direct downside market risk | Generally limited by contract guarantees | Yes, beyond the protection level | Yes |
| Upside limits | Often | Often | Generally driven by investment performance |
| Tax-deferred accumulation | Generally yes | Generally yes | Generally yes |
| Surrender period may apply | Yes | Yes | Yes |
Who might consider a RILA?
A RILA may be considered by an investor who wants market-linked growth potential but prefers to limit some downside exposure rather than accept the full volatility of an unprotected equity investment.
It may also be considered by retirees or near-retirees who want to divide assets among different risk categories rather than placing an entire portfolio into either fully guaranteed products or fully market-exposed investments.
When a RILA may not be appropriate
A RILA may not be suitable for an investor who needs unrestricted short-term liquidity, cannot tolerate any loss of principal, requires the full upside of equity markets, or does not understand the contract's crediting formulas.
Investors should also carefully evaluate an exchange from an existing annuity. A replacement can create a new surrender period and may cause existing guarantees or benefits to be lost.
Questions to ask before purchasing a RILA
- What exactly does the buffer or floor protect?
- How much downside exposure remains?
- What is the current cap or participation rate?
- Can those rates change for future segments?
- How long is each crediting period?
- What happens if money is withdrawn early?
- How long is the surrender period?
- What contract fees or rider charges apply?
- What happens if the issuing insurance company experiences financial problems?
- How does the RILA compare with simply holding a diversified investment portfolio?
- What other annuity or non-annuity alternatives were considered?
RILAs in firefighter retirement planning
Firefighters and other public-safety employees may enter retirement with pension income, DROP proceeds, governmental 457(b) assets and other retirement savings.
A RILA should therefore be evaluated as one component of a larger retirement plan, not as a stand-alone solution. Liquidity needs, pension income, Social Security, tax considerations and long-term market exposure should all be considered.
Start with the broader annuity education guide, or review 457(b) retirement planning and pension considerations.
About the author
Mark Buckley is a retired Miami-Dade Fire Rescue firefighter and paramedic, author of Beyond The Firehouse, and a financial professional with Prudential Advisors. His educational work focuses on retirement planning topics affecting firefighters, first responders and retirees.
This material is provided for general educational and informational purposes only and is not intended as individualized investment, insurance, tax or legal advice. Registered index-linked annuities are subject to investment risk, including possible loss of principal. Product features, buffers, floors, caps, participation rates, fees, surrender provisions and guarantees vary by contract.
Insurance guarantees are subject to the claims-paying ability of the issuing insurer. Investors should carefully review the applicable prospectus and contract before making a purchase decision.