What to know before you buy one
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Investors looking to capitalize on stock market gains but limit the impact of losses are increasingly turning to registered index-linked annuities.
Like other annuities, RILAs are insurance contracts that involve the delivery of money in exchange for a payment, usually at a later date. As the name suggests, the performance of a RILA is based on: a stock market index (or more than one index). They come with limitations on both the loss and growth side.
“It’s like putting a bumper on a bowling lane; you’re limited on both sides,” said certified financial planner Jessica McNamee, a wealth management advisor and founder of Sirius Wealth Strategies in Bellefontaine, Ohio.
RILAs’ sales reached an estimated $20.6 billion in the third quarter; This increased by 20% compared to the same period in 2024. latest research From LIMRA, an insurance and financial services trade group.
This year through September 30, sales reached $57.3 billion, up 18% from the same period last year. LIMRA expects sales to exceed $80 billion in both 2026 and 2027, said Keith Golembiewski, LIMRA vice president and head of annuity research.
“With the increasing number of income solutions and downside protection features…RILAs have become more attractive to a broader range of customers,” Golembiewski said. he said.
The growth comes as the stock market continues its rise over the past few years, with major stock indexes posting double-digit annual gains. For example, the S&P 500 index is up more than 85% since mid-October 2022. Some financial advisors advise investors to rebalance their portfolios and evaluate their risk tolerance in case there is a market correction or worse.
“We are then in a bull run cycle,” McNamee said. “As time goes on, the potential gain from this bull market diminishes and the potential risk of a prolonged market decline increases. I think clients are thinking: ‘How long can this last? [bull run] to continue?'”
At the same time, investors still accumulating their retirement savings need to get involved in the market if they want inflation-beating returns, and RILA can help with that.
But they are not without risk. Here’s what you need to know before buying.
Caps also blunt market gains
Note that these buffers don’t just affect losses: “Your losses are limited to some extent, your gains are limited to some degree,” McNamee said.
Although the details vary between RILAs, here is an example: Let’s say a RILA is based on the following: S&P 500 index and comes with a 15% decrease limit and a 15% increase limit. If the S&P falls 8%, you will not incur a loss. However, if it slips by 19%, you will see a loss of 4% (the amount above the 15% loss limit).
So on the earnings side, if the market jumps 20%, you’ll only see a 15% gain.
Using multiple indexes can help diversify holdings
You can choose the duration of the RILA contract (e.g. one, three or six years). There are also differences in the specifics of the market as well as your loss limit and gain limits (both are generally larger the longer the contract)
Using multiple indexes in your RILA can help you diversify your money. For example, let’s say you allocate 70% to the S&P index and the other 30% to a broad-based international index, McNamee said.
“If US stocks fall but the rest of the world stocks do well, that’s [index mix] “It helps reduce potential losses because we diversify,” he said.
An attractive aspect of RILAs is that: They usually come at no cost. There are no upfront sales fees or investment fees when you enter into the contract, McNamee said, because even though your returns are based on the performance of an index, you don’t own the index.
Review risk tolerance even with downside protection
These annuities are not risk-free.
For example, McNamee said, an RILA that provides up to 25% protection on the downside may seem generous, but history shows it could be worse: In the Great Recession from late 2007 to early 2009, the S&P lost more than 50%.
“I remind customers that we can experience this again,” McNamee said. “It is possible for the index to fall further than that and you could lose money.”
In other words, he said, it’s important to consider your risk profile before purchasing a RILA.
“The client needs to analyze whether an allocation to an index is in line with their risk tolerance, even if there is downside protection,” McNamee said.
Early access to money can be expensive
Ayrıca, RILA süresince paranızı genellikle kilitlediğinizi unutmamanız önemlidir. If you withdraw money from the annuity before the contract ends, you may pay what’s called a surrender charge.
Some RILAs allow you to withdraw up to a certain amount (say 10%) annually but impose a waiver Withdrawals beyond that limit will be charged a fee, McNamee said. These fees typically start higher at the beginning of the contract (for example, 8% of the amount you receive) and gradually decrease throughout the RILA.
Beyond lack of liquidity, it’s important to remember that RILAs, like other annuities, are subject to the same age-related withdrawal limitations as any other. retirement savings.
“The biggest mistake people make with annuities is that they don’t realize it’s still a retirement account even if it’s funded with non-IRA money,” McNamee said.
So, if you withdraw money before age 59½, you may be subject to a 10% early withdrawal tax penalty from the Internal Revenue Service.
