Frequently Asked Questions About Registered Index-Linked Annuities

Investors have been drawn to the benefits of registered index-linked annuities (RILAs): the opportunity for growth combined with a level of protection against market downturns. As a result, RILAs have dramatically grown in popularity over the past few years. From 2019 through 2023, RILA sales rose from $17.4 billion to $47.4 billion; and by 2026, sales are expected to be between $58 billion and $62 million.^1,2 Although benefits of RILAs – also known as buffered, index-linked, or structured annuities – may vary, this type of annuity generally operates similarly by offering index-linked growth opportunities and some level of protection. The questions and answers below can help you better understand RILAs so that you can have a conversation with your financial professional about whether one may be a good fit for a portion of your portfolio. For more details on some of the features of RILAs, as well as definitions of words you may encounter while researching RILAs, view our RILA dictionary.

What are some of the benefits of a RILA?

 

In a Brighthouse Financial study, 67% of investors said they were looking for investment choices that balanced growth opportunities with a level of protection.³ A registered index-linked annuity (also known as a buffered annuity) is a long-term financial product that allows you the opportunity to experience growth in the markets while providing some protection against down markets. This type of product has the potential to help you reach your long-term retirement goals. However, because a RILA tracks the performance of one or more market indices, there’s a possibility that the account could lose value; and once you choose a crediting strategy and select an index or indices, you typically can’t change those before the end of the contract term.⁴ A financial professional can help you better understand RILAs and their benefits, which can help you feel more confident in your investment.

What happens to a RILA investment when the index goes up or down?

 

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 being tracked, 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 you have 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 you lose nothing because the financial services 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 financial services company absorbs 10% of the loss, your loss is 4%. (If there were a 10% floor rather than a buffer, your 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 you earn 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, you earn 10%.

4 Potential Outcomes for a RILA Contract Owner

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

What are some of the ways that a RILA is different than a variable annuity?

 

The primary difference between a variable annuity (VA) and a registered index-linked annuity is that with a variable annuity, your money is invested directly in the markets. Generally, with a VA, your purchase payment(s) are directly allocated to market-based investment options and, if available, a Fixed Account. The account value of a VA will fluctuate with market performance. With a RILA, your account tracks the performance of an index or indices, and your purchase payment(s) are not directly invested in the market. Instead, the account value will be adjusted based on a formula that, among other things, tracks the performance of the selected index. A variable annuity may offer higher growth potential than a RILA because a RILA has an associated crediting rate. However, a variable annuity typically doesn’t offer any downside protection in volatile or down markets like a registered index-linked annuity.

What are some of the differences between a fixed, fixed indexed, and registered index-linked annuity?

 

A fixed or fixed rate annuity generally offers a guaranteed level of growth, paid in interest credits to your account. In fixed indexed annuities, the credits to your account are determined in part by the performance of an index. However, no matter what happens to the index, your principal (initial investment) is guaranteed not to lose value. In exchange for that guarantee, the crediting rates are generally lower on a fixed indexed annuity than a registered index-linked annuity (also known as a buffered annuity). In a RILA, there’s typically a cap on gains for the term of the annuity as well as either a buffer or floor to help provide some protection against loss. You may have the opportunity to capture the full growth of your selected index, or at least the growth up to the crediting rate, but the principal is not 100% protected.⁴

How can I maximize lifetime income with a RILA?

 

Generally, registered index-linked annuities (also known as buffered annuities) will offer the ability to receive guaranteed income through annuitization, which is the process of converting an annuity investment into a series of periodic income payments. However, some RILAs may be set up through an income benefit to offer a higher level of guaranteed lifetime income. In exchange, you may have lower crediting rates than an accumulation-focused RILA and there may be a fee for the income rider. Because access to lifetime income is an important part of preparing for retirement, a registered index-linked annuity that offers lifetime income may be a suitable option if you don’t have access to other lifetime income streams, such as a pension.

What is the difference between a buffer and a floor?

 

Some registered index-linked annuities (also known as buffered annuities) include a buffer, which limits the amount of any negative performance but leaves the contract owner to assume any remaining negative performance that exceeds the buffer. As an example, if the annuity has a 20% buffer and the index is down 25%, you would lose 5% of the account value. A floor, on the other hand, is a maximum percentage of loss that the contract owner is willing to take. For instance, if the annuity has a 20% floor and the market is down 25%, your account value would decrease by 20%. A buffer may be more beneficial in protecting you from small losses when the index or indices you’re tracking are only down slightly, but it provides less protection against large losses. Alternatively, a floor may be more beneficial in significantly negative markets because it provides a maximum level of loss, but it does not protect you from smaller losses during the term.

How can a RILA help my investment portfolio in times of market volatility?

 

During times of market volatility, RILA owners may have more confidence to remain invested for the full term knowing that their account value has a level of protection from market downturns. Additionally, with a RILA, the contract owner has the ability to participate in market growth opportunities based on their selected crediting strategy.

What are some of the risks associated with a RILA?

 

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 market index performance goes down more than the level of protection that the buffer or floor provides.⁴ Additionally, while not necessarily a risk, with a RILA, you have partial access to your 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 you to withdraw a percentage from your annuity each year without penalty, and there may be other circumstances, such as health care needs, in which a withdrawal charge may not apply.

What fees may be associated with a RILA?

 

Some registered index-linked annuities (also known as buffered annuities) are offered with no annual fees. However, there can be charges associated with the annuity if you withdraw from the contract beyond a certain amount or elect to close the account early (also called a surrender charge). RILAs that offer additional benefits through a rider, such as guaranteed lifetime income or a death benefit, may have a charge associated with that benefit.