The Registered Index-Linked Annuity is a hybrid annuity providing benefits of both a fixed index annuity and a variable annuity.
What Is A Buffer Annuity?
The Registered Index-Linked Annuity is a hybrid annuity providing benefits of both a fixed index annuity and a variable annuity. This annuity may be an excellent choice for investors that want to limit their downside exposure but are willing to be exposed to more downside risk in exchange for more upside growth potential.
Another name for this investment-based annuity is the “Buffer Annuity” or “Shield Annuity.”
The index-linked annuity is not the same as the fixed index annuity. You can lose money in a buffer annuity. You can not lose money in a fixed index annuity.
How Does a Registered Index-Linked Annuity Work?
Like a fixed indexed annuity, when the index performs positively, the annuity can earn interest credits, limited to a cap rate or a participation rate. The difference between these two annuity types is if the index performs negatively, an annuity owner can lose money up to a “buffer” or “floor.”
The Stock Market Downside Protection
- Floor: The maximum negative index percentage loss an annuity owner can experience over each index performance term, even if the negative index performance exceeds that percentage.
- Buffer: The buffer is the percentage of losses the insurance company protects an annuity owner from. The annuity owner assumes any losses beyond the buffer.
The Floor
The floor is designed for those comfortable with a set percentage of downside risk and who wants an absolute limit on losses at the end of each interest term in exchange for more upside potential.
The index performance is measured by the change in the index between the beginning of the interest term to the end of the interest term. Interest will be credited based on that growth if the index has grown at the end of the term. Conversely, if the index has declined by the end of the term, the insurance company will protect the annuity owner from losses beyond the floor.
Example: If the floor is 10%, and the index declines by 15%. The annuity owner will absorb the first 10% loss, and the insurance company will absorb the remaining 5%.
The Buffer
The buffer is designed for those wanting limited protection from down markets in exchange for more upside potential. The insurance company protects the annuity owner up to the buffer’s set percentage. Any losses beyond the buffer percentage are the annuity owner’s responsibility.
The buffer is measured by the change in the index’s value from the beginning of the interest term to the end of the interest term. If the index has grown, interest will be credited. If the index has declined, the insurance company will first protect the buffer’s percentage. Any losses that exceed the buffer will be the amount deducted from the annuity’s value.
Example: If the buffer is 10%, and the index declines by 15%, the insurance company protects the annuity owner from the first 10%, and the owner absorbs a 5% loss to their annuity.
Lock-in Feature
The lock-in feature allows an annuity owner to lock in the value on any business day before the end of the index-performance term. As a result, any interest earned applied to the index-linked annuity will be based on the beginning of the term and the lock-in date.
Accessibility
Like index and variable annuities, the index-linked annuity offers annual withdrawals, penalty-free. The death benefit is a lump sum to beneficiaries or spousal continuance for surviving spouses.
Annuitization is an option if the annuity owner wants a steady stream of income.
Waivers of Premium for eldercare purposes (nursing home, terminal illness, long term care) are available too.
How Do Buffer Annuities Compare?
| Variable Annuity | Fixed Index Annuity | Fixed Annuity | Immediate Annuity | Deferred Income Annuity | Buffer Annuity | |
|---|---|---|---|---|---|---|
| Principal Protection | No | Yes | Yes | Yes | Yes | No |
| Access To Principal | Yes | Yes | Yes | No | No | Yes |
| Control Over Money | Yes | Yes | Yes | No | No | Yes |
| Tax-Deferred Growth | Yes | Yes | Yes | No | No | Yes |
| Guaranteed Growth | No | Yes | Yes | No | No | No |
| Guaranteed Income | Yes | Yes | Yes | Yes | Yes | Yes |
| Inflation Protection | Yes | Yes | No | Yes | Yes | Yes |
| Death Benefit | Yes | Yes | Yes | Yes/No | Yes/No | Yes |
| Long-Term Care Help | Yes | Yes | Yes | No | No | Yes |
Conclusion
The registered index-linked annuity offers more upside potential than a fixed indexed annuity but less than a variable annuity. On the other hand, this annuity offers the potential to lose money like a variable annuity. Still, it is limited to the amount of loss an annuity owner can be exposed to before applying for downside protection, like a fixed index annuity.
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Frequently Asked Questions
What is the difference between an FIA and a RILA?
Both fixed index and registered indexed linked annuities earn interest based on the performance of an underlying index. However, a fixed index annuity offers a guaranteed minimum interest rate, while a RILA does not. As a result, you can lose money in a RILA, but you can not with a fixed index annuity.
When were registered index-linked annuities created?
RILA are relatively new products, with the first one being introduced only a few years ago. Fixed index annuities have been around for 20+ years.