Have you ever heard of a RILA? Let’s Explore What They Are and What You Need to Know
“These products offer the potential for gains exceeding the index's performance, all while
providing a protective buffer in case of a downturn, and potentially all for no fees!”
With the recent market volatility with both gains and losses, many individuals are seeking
strategies to stay invested in the market while safeguarding their investments in case of
downturns. One compelling solution to consider is the Registered Index-Linked Annuity (RILA).
However, it's essential to clarify what RILAs are but also what they are not! Their popularity has
surged in recent years, and for good reason. If you're contemplating adding a RILA to your
portfolio or are simply curious about their potential benefits, this article is made for you. I'll dive
into what RILAs are, how they function, who stands to benefit from them, and what they entail.
What Is a RILA and What Is It Not?
A Registered Index-Linked Annuity (RILA) is a financial product designed to facilitate growth
while providing a protective buffer against market downturns. Many RILAs offer a protective
cushion while allowing your investments to grow based on a specific index, often the S&P 500
index. They are products that need to be planned to be held for years, typically 3 to 6 years. If
you need to close the account early, you will not realize the benefits that the product offers.
Some have annual fees and now there are actually some without any fees! Equally important is
to discuss what they are not. Traditionally, people associate annuities as an income product and
many people have mixed feelings about them. However, while a RILA is a variable annuity, it
has no income component nor are you giving your funds away to an insurance company. The
funds are yours and will always be yours. It truly is a long term growth product, unlike many
annuities out there. In fact, there is discussion at the Federal level to make RILAs separate from
a traditional income oriented annuity. If all this sounds a bit much, let's simplify what a RILA is
with an example. In our example, let’s say the RILA is linked to the S&P 500 index, has a 6-year
term, a 10% buffer, and a 120% participation rate. Now, let's break it down to better understand
what’s going on:
Tied to: This indicates that the RILA's performance is directly linked to the performance of a
specific index, in this case, the S&P 500 index.
Term: This is the intended duration of the RILA. In the example mentioned, it's a 6-year
commitment. An early withdrawal or closure of the account before the term is fulfilled would
result in early surrender penalties and the account would not get the benefits of the buffer or
Buffer: Your buffer acts as a protective shield against losses, provided by the product company.
It’s very important to note that it is a buffer and not a floor or guarantee! A 10% buffer, as in our
example, ensures that any losses up to 10% or less in the given index at the end of the term
results in no loss to your account. Beyond that 10% buffer, your loss is directly proportional to
the index's loss. So if the index ended the term down 8%, your account would have no losses. If
it was down 13%, your account would have losses of 3%.
Participation Rate: This indicates the extent of the growth of your account that is derived from
the chosen index. In our example, it is a 120% participation rate. This means that if the index
grows by 10% at the end of the term, your account grows by 12%. If the index grows by 50% at
the end of the term, your account grows by 60%. You can see how this really accelerates growth
of your account!
Fee or No Fee: Many RILAs offer the flexibility to choose between fee-based or no-fee options.
Typically, products with fees provide a more substantial buffer and participation rates. The
choice is yours and it’s important to try to understand if that fee is worth a higher participation
rate or increased buffer.
How Do RILAs Operate?
The product company takes your funds and employs various strategies, often involving long
duration options and treasuries. The attractiveness of RILAs has soared recently due to rising
interest rates, which has enabled them to offer much more attractive terms. However, it's crucial
to understand that these products are intended to be held for the full term. Surrendering the
investment prematurely can result in early surrender charges, and the account's value will
fluctuate throughout the investment period, both positively and negatively.
What's in it for You?
RILAs are tailored for individuals seeking growth-oriented investments that they don't need to
access during the term. If you have a "bucket" of funds earmarked for the long term, a RILA can
be an ideal choice. Many investors who have long-term financial goals and wish to invest in an
index, such as the S&P 500, find RILAs appealing. These products offer the potential for gains
exceeding the index's performance, all while providing a protective buffer in case of a downturn,
and potentially all for no fees!
What Else Comes with Your RILA?
While investing in a RILA can be a great option, it's crucial to consider the broader context of
what else is offered with it. If you choose to invest in a RILA through an advisor, there's a
possibility you'll receive only the product itself. However, there are two factors that deserve
attention. First, is a RILA a suitable recommendation for your unique financial situation? Second,
is the advisor offering any other services complimentary to the RILA? When you become a client
of our firm, you gain access to our comprehensive wealth management through our Insight
Formula! This formula encompasses income planning, investment management, estate
planning, and tax strategy, among other services. Therefore, ensure you not only purchase the
RILA but also receive sound advice and comprehensive wealth management.
RILAs can serve as excellent growth investments if you have long-term financial goals and can
commit to holding the investment for the specified term. If you have any questions or need
further guidance, feel free to reach out! I’m here to help you explore whether a RILA aligns with
your financial objectives and circumstances.
Annuities are best suited for long term investors. RILAs are insurance contracts that are subject to investment risk, meaning it's value will fluctuate and loss of principal is possible. Some features mentioned may be available only by the purchase of a rider, an optional addition to an annuity that is available for an additional fee. Interest credited may be subject to caps, which are limits to the amount of interest that will be credited to an account even if the corresponding index performance exceeds the limit on the cap. Policies may be subject to participation rates, which are limits to the amount of interest that will be credited to an account. This feature of interest accreditation allows a contract to earn interest that corresponds to the performance of a stock market index proportionate to the participation rate stated. Earnings are taxable as ordinary income when distributed. Withdrawals before age 59 1/2 may be subject to an additional 10% tax. Guarantees are provided by the claims-paying ability of the underlying insurance company. Surrender charges may apply.