Comparing Registered Index-Linked Annuities With Other Investment Types

An annuity can be an effective method for earning a potential return on your investment, and some annuities offer the option of guaranteed lifetime income. Working with a financial professional to understand the benefits of different types of annuities and how they operate can help you evaluate whether a registered index-linked annuity (RILA) or another type of annuity may be a good fit for a portion of your portfolio.

This article details some key similarities and differences among RILAs and other annuity types as well as other investments. You can use this information to help guide your conversation with a financial professional about how an annuity may help you reach your retirement goals.

For definitions of many key words and phrases found in this article, view our RILA dictionary.

Key Features of RILAs and Other Investments

 

Annuities, stocks, and bonds offer a variety of features and benefits that help diversify a portfolio. While sharing some similar features, different types of annuities can offer different benefits. Financial services companies often provide options for various annuity types that allow investors to tailor the annuity allocation in their portfolio to better fit their needs. The chart below summarizes some of the key features typically offered by certain annuities, stocks, and bonds.

This chart lists some of the key features typically offered by certain annuities, stocks, and bonds. The information in this chart may not be complete or cover every situation, and features may vary between products within a particular asset type. This material is for general informational purposes only and should not be construed as legal, tax, accounting, investment, or fiduciary advice. Brighthouse Financial and its affiliates did not consider any individual’s circumstances in preparing this information. Clients should confer with their tax, legal, and accounting professionals in addition to consulting with a financial professional.

* RILAs and fixed indexed annuities do not invest directly in the markets. All guarantees assume staying within the parameters of the contract or riders. Features and benefits may vary by product and firm.

** Some types of U.S. Treasury securities offer a guaranteed rate of return if held to maturity. U.S. Treasury securities are direct obligations of the U.S. government and are backed by the full faith and credit of the U.S. government if held to maturity.

Fixed, Guaranteed Rate of Return

 

You may be looking for a guaranteed rate of return, no matter how the economy or markets perform.

• RILAs generally credit the contract owner at the end of the term based on the performance of a tracked index. The contract owner may choose to allocate a portion of their RILA premium to a Fixed Account, if available, to ensure more consistent and reliable growth.² This portion of the annuity would pay a fixed rate rather than tracking the performance of an index.
• Variable annuities (VAs) don’t usually guarantee a rate of return but instead measure credits based on the underlying funds the premium is invested in.
• Fixed indexed annuities may have different levels of guarantees but are an annuity product offering the possibility of growth through different crediting strategies or a fixed interest rate.
• Fixed and immediate annuities typically offer a set interest rate.
• Stocks offer no guaranteed rate of return.
• Although bonds have default risk, some types of U.S. Treasury securities offer a guaranteed rate of return if held to maturity.
  
  

Fixed indexed annuities and fixed annuities typically offer 100% protection for the purchase payment against market downturns. Purchase payments may be subject to withdrawal charges and market value adjustments.

Market Growth Opportunities

 

For some investors, it may be important to have access to potential market growth in order to increase the value of their assets to achieve their goals.

• Some RILAs include a Cap Rate crediting strategy, which is the maximum percentage gain from the tracked index that the financial services company credits to the contract owner at the end of the term. Additionally, a financial services company may offer other crediting strategies, which can provide a predetermined percentage of growth if the tracked index is flat, up, or greater than the buffer at the end of the term.
• Traditional VAs don’t usually have Cap Rates or Participation Rates because the premium is directly invested in the funds offered in the subaccounts of the annuity. The investor experiences gains or losses based on the market fluctuation of the underlying funds based on the chosen fund allocation.
• Similar to RILAs, fixed indexed annuities offer various crediting strategies like Cap Rate, Step Rate, and Participation Rate. Participation Rate is the amount of index growth an investor may capture as part of the annuity. For example, if the Participation Rate is 75% and the index increases by 15%, the interest credit would be 75% of 15%, or 11.25%.
• Fixed and immediate annuities generally only offer a guaranteed rate of return, which is not impacted by market performance.
• Stocks allow investors to participate in market growth but have no downside protection.
• Bonds can be sold on the open market, giving investors the opportunity for increased value. However, if an investor purchases a bond at par and holds it until maturity, the investor will receive the scheduled interest payments and can redeem the face amount of the bond.

Level of Downside Protection

 

As you get closer to retirement, protecting the value of your assets may be an important part of your strategy. It may be easier to reach your goals with investment options that offer some protection from market loss.

• Some RILAs offer a buffer, which limits the amount of any negative market performance but leaves the contract owner to assume any remaining negative market performance that exceeds the buffer. Other RILAs offer a floor, which is the maximum percentage of market loss that the contract owner is willing to take.
• Although VAs typically don’t offer a level of downside protection, the financial services company might offer a rider for a guaranteed minimum accumulation benefit that guarantees a minimum contract value after a specified period.
• Fixed indexed, fixed, and immediate annuities generally offer protection from market loss, meaning the investor’s initial investment can’t go down due to a market downturn.
• The value of stocks is tied to their performance and can decrease, with no protection for the investor.
• Investors who hold a bond until maturity will maintain the initial value of the bond; but if they look to sell it on the secondary market before maturity, the value may be higher or lower than the initial purchase price.

Annual and Ongoing Fees¹

 

Depending on the type of investment, annual and ongoing fees may be applied.

• RILAs don’t usually have annual contract fees or other fees related to the underlying investments because they don’t invest directly in an index.
• Traditional VAs often have annual fees and charges that cover administration costs for the contract and management of the investments in an annuity’s subaccounts. These fees may be waived if the contract amount is beyond a certain level.
• Fixed indexed and fixed annuities also generally have no annual fee, but some annuities may also have other fees such as those assessed for riders.
• Stocks and bonds don’t have specific fees, but there may be transaction fees as well as investment management charges for managing a portfolio of exchange-traded funds (ETFs) or mutual funds.

General Tax Treatment

Taxes are one consideration when determining the mix of investments within your portfolio, and it’s important to understand how each investment may impact your tax exposure.

• Qualified annuities are funded with pretax dollars, perhaps through an employer-sponsored retirement plan or an individual retirement account (IRA). As a result, taxes are usually paid on the distributions.
• Non-qualified annuities are funded with after-tax money. The investment grows tax-deferred and the contract owner’s earnings may be subject to taxes when they take withdrawals from the account.
• For stocks and bonds in qualified accounts, money withdrawn from the account is taxed as income. Investments in stocks and bonds in non-qualified accounts may be subject to capital gains taxes.

Access to Money Without Fees

 

If you need immediate access to cash, consider investments that you can sell more easily and with less potential penalty. Annuities provide varying access to your money, but annuity gains that are withdrawn may be subject to taxes.

• RILAs as well as variable, fixed indexed, and fixed annuities offer penalty-free withdrawals under certain circumstances; however, taxes may be due on the withdrawal. Depending on the type of annuity, the contract owner may be subject to a surrender charge, which is a percentage charge applied to a withdrawal amount in excess of the Free Withdrawal Amount in a contract year. These charges decline over time and usually discontinue after the contract surrender period.
• Stocks and bonds can typically be sold to create immediate liquidity; however, there may be capital gains taxes based on the length of time the assets have been held.

Lifetime Income Option and Minimum Death Benefit Guarantee

 

If generational planning is important to your plans for retirement, you may want to know how your investment is transferred to family in the event of your passing.

• Retirement income options and death/legacy benefits are common features of all annuities, either in the form of riders to the contract or as part of the base offering. An annuity’s minimum death benefit generally guarantees the higher of the account value or a return of the premium less withdrawals.
• Stocks and bonds may be passed on through beneficiary designations and other methods.

Talking to a Financial Professional About the Benefits of RILAs

 

Learning about the similarities and differences between different types of investments can be an important first step in understanding whether an annuity may be an option to help meet your long-term retirement goals. Speak with a financial professional about the features you’re seeking and to find out if a RILA may be a possible fit for a portion of your portfolio.