Celebrating Annuity Awareness Month With a Look at RILAs

What You Need to Know

RILAs were born just 10 years ago.
In 2023, sales reached $47.4 billion.
RILAs typically do not have base contract fees.

The arrival of June means that it’s time, once again, to celebrate Annuity Awareness Month.

With retirement security being top of mind for many people these days, this month provides an important opportunity to drive even greater awareness of the key role that annuities can play in helping clients protect and grow their retirement savings.

One type of annuity that many financial professionals remain interested in learning more about is registered index-linked annuities, or RILAs. This makes sense, given the relative newness of the product category, which became available just over 10 years ago.

Judging by the growing demand for the product, many financial professionals have done a good job helping clients understand the benefits that RILAs can bring to a portion of their portfolio. According to LIMRA, total RILA sales reached $47.4 billion in 2023, an increase of 15% versus 2022 sales and an all-time high for the category.

This month, in a series of articles, I’ll highlight various aspects of RILAs for those financial professionals who want to learn more about these products. I’ll also share insights from consumer research conducted by Brighthouse Financial that can help financial professionals drive more effective client conversations about RILAs.

In this first article, I’ll explain what a RILA is, as well as some of the features and benefits that these products provide.

Please note that this article is for general informational purposes only and should not be construed as legal, tax, accounting, investment, or fiduciary advice. Clients should confer with their tax, legal, and accounting professionals in addition to consulting with a financial professional.

What Is a RILA?

RILAs are sometimes referred to as buffered, indexed-linked, or structured annuities.

RILAs were originally developed to help investors who want a long-term financial product that provides some protection from market volatility as well as opportunities for market-linked growth.

RILAs allow clients to participate in market growth opportunities, up to a certain percentage, by tracking the performance of one or more market indices, which may include the S&P 500®, the Nasdaq-100®, or other indices.

By offering varying levels of downside protection, RILAs also help ensure that clients’ losses are limited when markets turn volatile.

How RILAs Work

Among the variety of features that RILA contracts include, some of the most important are crediting strategies, such as cap rates, step rates, and participation rates, and downside protection options, such as buffers and floors.

The cap rate is the maximum percentage gain from the tracked index’s performance that the issuing insurance company will credit the annuity contract owner at the end of the selected term. The cap rate will vary based on the term length, tracked index, and buffer or floor.

For example, if the cap rate is 200%, and the index performance increases by 150% at the end of the term, the contract owner’s account value will increase by 150%. However, if the index performance increases by 250% at the end of the term, the account value will increase by 200%.

Step rates are a predetermined percentage of growth credited to the account if index performance is flat or up at the end of the term. If, for example, a contract has an 8.5% step rate, and the index performance is 0% or positive, the account will be credited the full step rate of 8.5% at the end of the term.

Participation rates are the percentage of index growth an investor may capture at the end of the term. For example, if the participation rate is 75%, and the index increases by 15%, the interest credit will be 75% of 15%, or 11.25%.