RILAs, The Middle Ground

RILA stands for Registered Index-Linked Annuity. You may also hear it called a buffered annuity or a structured annuity.

It is the newest of the five, and it sits right between a fixed index annuity and a variable annuity.

Like an FIA, your growth follows a market index, like the S&P 500, with a cap on how much you can earn. Unlike an FIA, you can lose money. In exchange for taking some of the risk, you usually get a much higher cap.

Here is how the protection works. There are two kinds.

A buffer. The insurance company absorbs the first part of a loss. With a 10% buffer, if the index drops 8%, you lose nothing. If it drops 25%, you lose 15%.

A floor. You absorb the first part of a loss, up to a limit. With a 10% floor, if the index drops 8%, you lose 8%. If it drops 25%, you lose 10%, and the company covers the rest.

A buffer protects you in normal down years. A floor protects you in a disaster. They are not the same thing, and a lot of people mix them up.

Let's say you put $100,000 into a RILA with a 10% buffer and a 15% cap.

• Year 1: S&P up 20%. You earn 15%. Balance: $115,000.
• Year 2: S&P down 8%. You lose 0%. Balance: $115,000.
• Year 3: S&P down 25%. You lose 15%. Balance: $97,750.
• Year 4: S&P up 10%. You earn 10%. Balance: $107,525.

Over four years the market lost about 9%. You gained about 7.5%. But look at year three. A RILA can lose money. A fixed index annuity cannot.

Why "registered"? A RILA is registered with the SEC, like a security. It comes with a prospectus, and the person selling it needs a securities license, not just an insurance license. Read the prospectus. That is where the caps, buffers, and fees are spelled out.

Fees. Many RILAs have no yearly fee on the basic contract. The cost is built into the cap. Add an income rider or a death benefit rider and you will pay for it every year. Surrender periods are commonly five to seven years.

Who a RILA is right for:

• Someone who wants more growth than an FIA offers and can live with a limited loss
• Someone with a six-year or longer time horizon on the money
• Someone leaving a variable annuity who wants some protection without giving up all of the upside
• Someone who understands exactly how their buffer or floor works

Who a RILA is wrong for:

• Someone who cannot handle any loss at all (a MYGA or FIA is better)
• Someone who needs the money in the next few years
• Someone who wants monthly income today (a SPIA is better)
• Anyone who cannot explain their buffer back to you in one sentence

RILAs are one of the fastest-growing kinds of annuities in the country, and some of them are very good. But "protected" does not mean "cannot lose." If someone tells you a RILA is as safe as a fixed annuity, ask them to show you the buffer on paper.