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 the benefits of a registered index-linked annuity (RILA).*
What is a RILA and who can benefit from one?
A RILA is an insurance product that's described as a cross between a fixed indexed annuity and a variable annuity. It may be a good match for a client who wants to limit downside exposure and is willing to accept some market risk in exchange for more growth potential.
- Buffered annuity
- Index-linked variable annuity
- Structured annuity
A closer look
Like fixed indexed annuities (FIAs), RILAs 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 retirement income payments. Neither a RILA nor a FIA are stock market investments, and they do not directly participate in any stocks or equities. Instead, earnings from a FIA or a RILA are based in part on the performance of a market index.
However, a RILA does differ from a FIA. With a RILA, clients do assume a level of risk due to market loss in exchange for higher growth potential above its minimum guaranteed interest rate.
How it works
Participation rates and cap rates are index crediting strategies that offer a RILA’s potential to earn additional interest credits based in part on the performance of a benchmark index. Because the upside and downside limits of a RILA are connected, a higher level of protection from market 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.
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RILAs still offer a level of protection from any loss with a buffer, however. This feature limits exposure to market loss by a specific percentage, typically 10, 20 or 30 percent. For example, if an index declines 15 percent and a client chooses a 10 percent buffer, he or she would only incur a 5 percent loss.
Meeting the need for accumulation
While clients can annuitize a RILA, 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. RILAs may be able to fulfill an accumulation need for those clients in retirement or who are close to reaching retirement age, typically within five to seven years.
Investing can feel smooth as glass when there’s time to ride out the effects of volatile markets. But the closer retirement gets, the less time there is for investors to recoup lost ground. For clients who want some protection from market swings and growth opportunities, adding a RILA to their retirement portfolio may be the right option.
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