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Comparing RILAs and VAs
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Annuities have been around for hundreds of years for good reason. While much has evolved, one thing stays constant: there’s never a shortage of financial needs to fill. Much as they always have, clients continue to turn to annuities to help grow and protect their money. The questions to ask become: How much growth? And how much protection?
Depending on the client and the need, the answers may lead to a variable annuity (VA) or a registered index-linked annuity (RILA).
Key takeaways
- VAs offer the highest growth potential but full market risk
- RILAs offer index-linked growth potential with a level of protection from loss due to market downturns
- FIAs provide full principal protection from market loss with some limits on growth potential
- Unlike other annuities, RILAs and VAs require both insurance and securities licenses
How variable annuities work
VAs allow for direct investment in accounts similar to mutual funds. While VAs offer the growth potential that comes with full exposure to the markets, they also carry more risk than other annuities since they can be fully exposed to loss if the market declines.
How registered index-linked annuities work
RILAs are a newer type of annuity designed mainly for people seeking accumulation with a measure of protection from market loss. Unlike VAs, RILAs do not directly participate in stocks or equities. But they do offer growth opportunities in the form of index-linked interest credits up to the annuity’s cap or participation rate. When the linked index performance is positive, interest credits are earned. If the index performance is negative, the RILA’s buffer or floor absorbs a percentage of any decline in index value.
For example: With a 10% buffer, if the index is down 8% over the crediting term, the buffer absorbs that decline (the credited result may be 0% before other adjustments). If the index is down 18%, the first 10% may be buffered and your client could be exposed to the remaining loss (e.g., roughly -8%), depending on contract terms.
Key risk and growth differences
RILAs and VAs serve different purposes and carry different levels of growth opportunities and risk. Variable annuities offer the highest growth potential with the highest downside risk.
Registered index-linked annuities offer more growth potential than other fixed annuities, but with limited protection from market loss.
Here's a breakdown of how VAs and RILAs compare in key areas.
Feature
|
VA
|
RILA
|
| Direct market investment |
Yes |
No |
| Market participation method |
Investment in sub-accounts |
Linked to external market index |
| Downside protection |
None (without rider) |
Buffer or floor |
| Market loss exposure |
Full |
Partial |
| Growth potential |
Highest |
Moderate to high |
| Securities license required |
Yes |
Yes |
| Risk tolerance |
High |
Moderate |
Licensing considerations for selling RILAs and VAs
While these annuities have a purpose and matching risk tolerance profile, they may not be available for all financial professionals to sell. VAs and RILAs can only be marketed and sold by securities licensed financial professionals. If you’re not currently securities licensed, it may be worthwhile to weigh the options of becoming licensed. While it requires an investment of time and effort, the additional opportunities attaining a securities license could mean for you, your firm and your clients may be worth it.
Matching annuity types to client risk tolerance
Choosing the type of annuity depends on client goals and appetite for risk. For that reason, it’s important to know your client’s annuity “comfort zone” when it comes to the amount of risk they’re willing to take.
- Because variable annuities carry the highest risk, they are typically considered for clients who can absorb the impact of market declines.
- A RILA may be a good match for clients who want growth and some downside protection. Registered index-linked annuities may appeal to people willing to accept some market risk in exchange for stronger growth potential.
Frequently Asked Questions
What is the difference between a RILA and a variable annuity?
A RILA offers index-linked growth potential with partial downside protection through a buffer or floor. In exchange for some protection, growth can be limited by cap or participation rates, depending on the RILA.
A variable annuity is directly invested in the market without built-in downside protection. While RILAs limit exposure if the market declines, clients assume full market risk with a VA. In exchange for accepting more risk, a VA offers higher growth potential than a RILA.
How is a RILA different from a fixed indexed annuity?
RILAs provide limited downside protection, allowing for greater market exposure and the potential for higher growth in exchange for accepting some downside risk. However, a fixed indexed annuity protects 100% of a client’s principal from market loss. In exchange for that level of protection, there’s lower growth potential.
Do financial professionals need a securities license to sell RILAs?
Yes. RILAs and variable annuities are both registered securities products that require a securities license to sell. Fixed indexed annuities do not require a securities license.
Annuities continue evolving, giving today’s retirees more options than ever. By helping your clients understand the ways FIAs, RILAs and VAs differ, you give them the knowledge to choose an annuity that best matches their goals. This approach can help build trust, strengthen client relationships and support practice growth.
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*Although fixed indexed annuities offer principal protection from market downturns, the deduction of applicable charges could exceed any interest credited, resulting in the loss of principal.
Guarantees provided by annuities are subject to the financial strength and claims paying ability of the issuing insurance company.
Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.
Registered index-linked annuities are designed to be long-term investment products used to help provide income for retirement. They are not suitable as short-term investments. There is a risk of substantial loss of principal and related earnings depending on the Segment Option(s) to which your client allocates their Purchase Payment. In the event of negative index performance, Segment Credits may be negative after application of the Buffer Rate and your client agrees to bear the portion of loss that exceeds that rate.
