A registered index-linked annuity (also known as a buffered annuity) is a long-term financial product that allows clients to participate in growth opportunities by tracking market indices while providing some protection against down markets. This type of product can help investors stay on track toward reaching their long-term goals by potentially taking some of the emotion out of investing that may cause investors to sell during down markets and possibly miss out on gains. RILAs may also give clients confidence since they have a level of protection – even in volatile markets. In a study conducted by Brighthouse Financial, 67% of investors said they were looking for investment choices that balanced growth opportunities with some level of protection.³

Clients who are interested in purchasing a registered index-linked annuity (also known as a buffered annuity) start by choosing their index strategy from a combination of factors: the term, or length of time the RILA will track the index; the index they want to track; and the level of protection, either in the form of a buffer or a floor, they want to have. For example, an issuing insurance company might offer a Cap Rate, which is the maximum amount of index growth the client would receive at the end of the term. At the end of each term, the index value at the beginning and end of the term will be compared – factoring in the buffer or floor as well as the Cap Rate – which will result in a new account value. If the index value is up at the end of the term, the account value would be credited with that growth up to the Cap Rate. If the index value is down at the end of the term, the buffer or floor would limit or potentially negate any loss for the client, with the company absorbing part or all of the loss, depending on the extent of the decrease and the chosen level of protection.⁴ Clients have the option of diversifying their RILA by putting a portion of their premium payment into various index strategies, giving clients the flexibility to help achieve their financial goals.

Registered index-linked annuities (also known as buffered annuities) have an associated term, which is typically 1, 2, 3, or 6 years. If there’s volatility or times of declining markets during the term, financial professionals can explain to clients that the level of downside protection associated with the RILA can help protect a portion of their portfolio. Without this level of protection, clients may be tempted to try to time the market’s movements, which can often have suboptimal results. One study showed that the average investor underperformed the broader market by 7.9% from 2012 to 2021.⁵

Performance of a $10,000 investment in the S&P 500 Total Return Index from January 1, 2003 through December 30, 2022.

While the hypothetical scenarios below illustrate four potential outcomes, actual outcomes will vary based on the chosen index option. An index option is the combination of factors within a registered index-linked annuity, including the index, level of protection, crediting strategy, and term. A crediting strategy is the method used to determine how much interest the contract owner will receive at the end of the term. RILAs (also known as buffered annuities) offer different crediting strategies depending on the product selected. One example of a crediting strategy is a Cap Rate, which is the maximum percentage gain from the tracked index that the contract owner may be credited at the end of the term.

In the following scenarios, let’s assume a client has a RILA with a 10% Cap Rate, 10% buffer, and 1-year term. These scenarios also assume no withdrawals and are for illustrative purposes only.⁴

• Index performance loss is within the buffer: The index performance (also known as index value) at the end of the term is down 7%, which is within the 10% buffer, so the client loses nothing because the issuing insurance company absorbs the loss.
• Index performance loss is greater than the buffer: The index performance at the end of the term is down 14%. Because the insurance company absorbs 10% of the loss, the client’s loss is 4%. (If there were a 10% floor rather than a buffer, the client’s loss would be 10%.)
• Index performance gain is less than the Cap Rate: The index performance at the end of the term is up 7%, which is less than the 10% Cap Rate, so the client earns 7%.
• Index performance gain is greater than the Cap Rate: The index performance at the end of the term is up 15%, which is greater than the 10% Cap Rate. In this case, the client earns 10%.

Assumptions:    $100,000 Initial Purchase Payment  |  1-Year Term  |  10% Buffer  |  10% Cap Rate

The markets are unpredictable, but financial professionals can talk about RILAs (also known as buffered annuities) in a way that inspires confidence in clients and helps them stay focused on their long-term retirement goals during market corrections or periods of volatility. One way to position this to clients is that the level of protection that a RILA provides in down markets means that when markets rebound, RILA owners may have an advantage – they’ll have less to recover to get back to even or begin to see increased value in their accounts. For example, without any kind of buffer, if the market is down 20%, an investor would need to see the index value rise 25% to get back to even. But if the market is down 20% and a client has a 10% buffer in their RILA, their loss would be limited to 10% since the issuing insurance company would absorb the first 10% of loss. In this scenario, the index value would need to increase 11% to get back to even. Knowing a portion of their portfolio is protected during down markets can provide clients with the confidence needed to stay invested for the long term, particularly when they understand they have less to recoup after a downturn and that they can capture gains in rising markets.

Financial professionals can demonstrate their expertise by discussing the benefits of a registered index-linked annuity, which include the ability to participate in growth opportunities during up markets while maintaining a level of protection in down markets. Having discussions about products like RILAs (also known as buffered annuities) can also help financial professionals develop stronger relationships with clients because these types of products can encourage deeper conversations about topics ranging from goals and risk tolerance to market volatility and the impact of emotional investing. Financial professionals can also point out the potential for reducing the variability of outcomes a RILA provides and remind clients during down markets that the annuity portion of their portfolio is outperforming the index because of the buffer.

Although a registered index-linked annuity (also known as a buffered annuity) provides a level of downside protection, there’s a risk that the account could lose value if:

• The RILA has a buffer and the index performance loss is greater than the level of protection that the buffer provides⁴
• The RILA has a floor and there’s any amount of loss⁴

Additionally, while not necessarily a risk, with a RILA, clients have partial access to withdraw their money without fees. There may be a withdrawal charge for taking an early withdrawal from the contract before the end of the contract surrender period. Most RILA providers allow contract owners to withdraw a percentage from their annuity each year without penalty, and there may be other circumstances, such as health care needs, in which a withdrawal charge may not apply.

Some registered index-linked annuities (also known as buffered annuities) are offered with no annual fees because the issuing insurance company is able to offer potential growth and a level of protection by using money from the premium payment to purchase a basket of options that replicate the payoff structure of the chosen Index Strategy. The remainder of the premium funds are typically invested in high-quality fixed-income assets, giving the issuing insurance company a stream of income during the course of the annuity. However, there can be charges associated with the annuity if the contract owner withdraws from the contract beyond a certain amount or elects to close the annuity early (also called a surrender charge). RILAs may include additional benefits through a rider, such as guaranteed lifetime income or a death benefit, that may have a charge associated with that benefit.