3-minute article

What is a registered index‑linked annuity and how does it work?

As your clients near retirement, protecting their money from potential losses due to an uncertain market environment may become a priority. But for some investors, the cost of gaining protection from market risk may not be worth the benefit. If you have clients in this situation, you may want to discuss a registered index‑linked annuity.

Registered index‑linked annuities are known by many names, including index‑linked variable annuities, buffered annuities and structured annuities. This insurance product is described as a cross between a fixed indexed annuity and a variable annuity. It may be a good match for clients who want to limit their downside exposure, but are willing to accept some market risk in exchange for more growth potential.

A closer look

Like fixed indexed annuities, registered index‑linked annuities provide the opportunity for growth based on the performance of a stock market index. Other similarities include tax‑deferred growth potential, annual free withdrawal amounts, and an option to convert the annuity into a stream of income payments in retirement. Both a registered index‑linked annuity and a fixed indexed annuity are not stock market investments and do not directly participate in any stock or equity investments.

However, registered index‑linked annuities differ from indexed annuities in that clients do assume a level of risk of market loss in exchange for a higher cap on the upside potential.

How it works

The upside and downside limits of a registered index‑linked annuity are connected, so a higher level of protection from downside risk means a lower cap on upside potential, and vice versa. When index performance is positive during a term, your client’s annuity may earn interest credits, limited by a cap or participation rate. Index declines can result in negative interest credits, with a level of protection from any loss.

Downside protection

A “buffer” and a “floor” are two options that limit exposure to market loss.

  • Buffer: Percentage of downside protection, typically 10, 20 or 30 percent. For example, if an index declines 15 percent and your client has a 10 percent buffer, he or she would incur a loss of 5 percent.
  • Floor: Opposite of the buffer option. In this case, your client is exposed to the percentage loss up to the floor amount, but is protected against any loss after this percentage. For example, if a client chooses a product with a 10 percent “floor” and the market declines 15 percent, your client would lose 10 percent, because the floor limits the downside.

Meeting the need for accumulation

While clients can annuitize a registered index‑linked annuity, few products offer an optional income rider and the product is generally considered an accumulation solution. If your client is searching for an option that provides lifetime income or living benefits, another annuity solution may be a better fit. Registered index‑linked annuities may be able to fulfill an accumulation need for those clients in retirement or are close to reaching retirement age, typically within five to seven years. This product solution may be most suitable for those who wish to supplement their retirement plan and would like to choose from a variety of protection and growth options to create a strategy that aligns with their individual retirement needs.