Unlocking the Potential of Registered Index Linked Annuities (RILAs): A Comprehensive Guide

Korey Knepper |

Annuities are a polarizing topic in the world of financial planning and investment management. While they can be valuable tools, they're not suitable for everyone, and it's important to recognize that not all annuities are created equal. In fact, in my opinion, over 90% of annuities out there are subpar. However, there are still some that can make sense depending on the situation. One type that has gained significant traction in the investment world over the last couple of years is the Registered Index Linked Annuity, or RILA for short.


But what exactly is a RILA, and how does it differ from other annuities? A RILA operates differently in several keyways. Firstly, it is directly tied to an index, such as the S&P 500, Russell 2000, or MCSI EAFE, as opposed to providing a fixed percentage return (as with a fixed annuity) or having an underlying investment (as with a variable annuity). While equity indexed annuities offer a similar option, many of these products come with low caps and high floors, primarily designed to safeguard against losses. RILAs used to resemble these products closely, but recently, annuity companies have been altering the caps on this product. In my analysis of four different companies, I found that over the past two years, the caps have increased on average by 853%, with some even becoming uncapped. This increase has been accompanied by maintaining a 20% buffer.


What does this mean for investors? It means they can invest a lump sum into a RILA and receive 100% of the market's gains while being shielded from the initial 20% of losses. For example, if we invest $100,000 into a RILA tied to the S&P 500 index with a 20% buffer over a term of six years, even if we experience returns like the worst six-year period for the S&P 500 (-15.2%), the buffer will cover all market losses. And in the event of a more severe downturn, say a 25% decline, the buffer would mitigate the first 20% of losses, leaving the product down by only 5% over that time. Conversely, if the market performs well during the six-year term, achieving a total return of 200%, all gains would be uncapped, resulting in an investment worth $300,000. Furthermore, selecting a product with a participation rate over 100%, such as 110%, would yield gains 10% higher. For instance, if the market rises by 200%, this product will see a gain of 220%, translating to an additional $20,000 gain.


However, there is a catch — the six-year term. To avoid surrender charges, the original investment must remain in the product for at least six years. This limitation means that the product is not suitable for those who prioritize liquidity. Nevertheless, many RILAs are offered without fees beyond the surrender charges. In other words, this product does not incur immediate monetary costs but requires a commitment of time.


So, where does this product work well? One significant use case is utilizing an in-service withdrawal from a 401(k) for individuals over 50. This avoids creating a taxable event, as the product is purchased as an IRA. RILAs can also be advantageous for IRAs, particularly for individuals who won't reach age 59 ½ during the six-year term. Additionally, RILAs can serve to add a layer of protection to an overall investment portfolio, enabling more aggressive investment in other areas.


If you're interested in learning more about this product, please use the following link to schedule a call. As always, thank you for reading!