Registered Index-Linked Annuities – RILA
An increasingly popular annuity that offers the potential for growth with a level of downside protection.
Have you been looking into annuities as an option for part of your retirement strategy? If you’re nearing retirement and want to take advantage of growth potential with a level of downside protection not seen in traditional investments, consider a RILA. It’s a type of annuity that may be able to deliver the combination of risk and reward you’ve been looking for. This article will help you understand:
How is a registered index-linked annuity different from other annuities?
A RILA is a relatively new type of annuity designed to provide the growth potential of a variable annuity combined with the investment risk protection of a fixed index annuity. To better understand what that really means, it helps to review the different types available and how annuities work.
An annuity is a contract with a life insurance company to take a sum of money – the principal – and turn it into a series of guaranteed payments, typically to create monthly income in retirement (which is why it’s often called an income annuity).The income payments can continue throughout your lifetime or for a period of time you designate, such as 10 or 20 years.
An immediate income annuity is typically funded with a single lump-sum payment, and income payments start within a year.* On the other hand, a deferred annuity acts as a savings vehicle that lets you invest money over several years and then take income later. As you accumulate funds, your money grows differently in different types of annuities, depending on your appetite for investment risk and potential returns.
A fixed rate annuity provides a guaranteed rate of return on the premiums you contribute, so there’s no investment risk, which makes it very predictable. However, other types of annuities may offer more growth potential, but less certainty.
Unlike a fixed rate annuity, a variable annuity (VA) lets you invest in securities – such as stocks and bonds – to take advantage of the highs and lows of the financial markets over time. And, those earnings are tax-deferred until you’re ready to start receiving guaranteed income payments. But you must be willing to accept investment risk and volatility. Also, there is no way to guarantee the amount of your eventual income payments, because there’s no way to accurately predict market performance: your principal could grow substantially – or in a down market, it could actually lose value.
A fixed indexed annuity (FIA) offers potential growth tied to a market index (for example, the S&P 500®). However there’s a cap on maximum gains, as well as a minimum guaranteed interest rate. So you can benefit – up to a point – when the market performs well and have protection from losses to your principal in a down market.
A registered index-linked annuity or RILA is a type of deferred annuity in which you can take advantage of potential tax-deferred growth, because your principal is tied to the performance of one or more stock market indices and may be capped on the upside, while also limiting losses during a market downturn with a level of protection.
How is a RILA different from a variable or fixed index annuity? Generally speaking, RILAs offer less growth potential but a level of protection from downside risk compared to a traditional variable annuity, and more growth potential but less protection from downside risk than a fixed-index annuity. A RILA also lets you define the maximum amount of losses you’re willing to accept by having different levels of protection you can choose for your investment– and the less protection you have around your investment, the greater your potential for upside gains tied to your selected market index.
How registered index-linked annuities work
It’s important to understand that the principal in your RILA isn’t directly invested in the market index you choose; rather the insurance company tracks how the index performs to help determine the investment gains or losses within your contract. As the annuity owner, you choose from different available “strategies”, which basically define the rules for calculating investment performance. There are few key concepts to look at when considering how investments in your RILA work:
The strategy term
This is the “investment horizon” for your strategy, or amount of time between the start point and end point of a strategy, such as 1, 3, or 6 years. You may see this referred to as a “point-to-point” investment. At the end of your term, your contract value will go up or down based on the index performance and your selected strategy.
The downside protection mechanism
A strategy can have either a buffer or a floor to protect against negative index performance at the end of your strategy term. A buffer protects you from a percentage of the loss. So for example, a -10% buffer means the insurance company absorbs up to 10% of index losses at the end of the term. A floor caps the maximum loss you’re willing to take: a -10% floor means that if the index is down at the end of your term, you absorb the first 10% of any losses, and the insurance company absorbs any losses beyond that.
The upside crediting mechanism
If an index you selected to track has positive performance at the end of your strategy term, it can be limited by a cap rate and/or a participation rate. To illustrate, with a 10% cap rate, you get any positive returns up to 10%, and the insurance company gets the rest. With a participation rate you get a percentage of any positive index performance. For example, if the index has grown by 20% at the end of your strategy and the participation rate is 50%, the return credited to your investment is 10%.
An example of how a RILA protection strategy could work
There are many ways protection strategies can work in a RILA, but generally speaking the higher amount of downside protection you opt for, the more limited your upside growth potential will be. It’s a risk-and-reward tradeoff in which you set a level beyond which the risk becomes too much, but this means you may also forgo some potential gains. To illustrate, let’s look at a simple scenario:
A 1-year strategy term
A -10% protection buffer
A 10% cap rate (and 100% participation rate)
A $100,000 contract value (CV)
What happens if your index is down at the end of your term:
If the index has a mild decline, for example, a 3% fall over your point-to-point term, then the -10% buffer protects you from all losses and your CV remains at $100,000. However, if your index suffers a very substantial decline of 15%, your -10% buffer means you will only lose 5% of your contract value, so at the end of the term your CV is $95,000 (but without any buffer, it would be just $85,000).
What happens if your index is up at the end of your term:
With a 10% cap rate, if the index gains up to 10% over your point-to-point term, all the gain is credited to your contract. So if the index rises 7%, your CV at the end of the term is $107,000. On the other hand, if the index gains 17%, your gains are capped at 10%, and your new CV will be $110,000.
Potential to grow your investment
Growth that is potentially higher than fixed or fixed-index annuities.
Limit exposure to market risk
A level of protection from market downturns that is based on your comfort level with risk.
Tax advantages
Tax-deferred growth potential for your investment (like other types of deferred annuities)
No explicit fees
With no fees to reduce your contract value, more of your money works for you.
Who is a RILA best suited for?
This type of annuity may be a good choice for you if:
You are comfortable with some degree of risk in exchange for a potentially higher rate of return
You are nearing retirement and wish to place a protection buffer on the degree of market loss to which your stock or equity investments are exposed
You don’t need the money right now and are comfortable with a long-term investment that has time to weather some degree of market risk
You are interested in an investment vehicle that provides tax-deferred growth, with the understanding that withdrawals will be subject to ordinary income tax
You see the value in having a limit on what you can gain from your investment because there is also a limit on what you can lose.
It's important to remember that a registered index-linked annuity, like any annuity, should be considered as part of your overall retirement strategy, along with as Social Security income, 401(k)s, pensions, brokerage accounts, or other retirement income sources.
How to buy a RILA
Registered index-linked annuities like Guardian MarketPerformTM can provide you with a sense of security for your retirement, offering growth potential for your retirement assets while providing a level of protection during market downturns. Once you decide with your financial professional that a RILA can help with your goals, and how much to invest, the basic process for making strategy choices with your Guardian MarketPerformTM annuity) is straightforward.
1
Pick a Strategy Term
1-, 3-, or 6-year time frames
Track the performance of an index for 1, 3, or 6 years.
2
Select a level of protection
-10%, -20%, or -30%
Choosing less protection gives you increased upside potential.
3
Select indices to track
4 indices to choose from7
Decide on your investment selection(s) and the percentage of your investment to allocate toward them.
While there are only three main choices to make, there a large number of possible variables that could affect your investment, so contact a Guardian financial professional to learn more about registered index-linked annuities work. Or, start by using this digital tool that can help you understand the possible outcomes that Guardian MarketPerformTM could provide in different market scenarios.
To find a Guardian financial professional near you, just fill in your zip code and click below.
