Much of what I write about is derived from what I hear from the hundreds of agents that work with my company as their IMO. With that, something that has come up a lot in recent months from many of my agents is the topic of RILAs, or Registered Indexed Linked Annuities. The two questions I get on these products are:
- What are these products?
- What are the additional fees?
What are RILAs?
This article is not intended to be a comprehensive training on RILAs as there are product variations beyond the scope of this article—different indexes, inverse strategies, various crediting segments, etc. Rather, this article is designed to give those that come across these products enough knowledge to at least know what they are looking at.
RILAs can also be called “Structured Annuities.” For the last decade or so, RILAs have been the top area of growth in the variable annuity business as RILAs have gone from basically non-existent to approximately $40 billion in sales in the year 2022. RILAs now take up around 40 percent of the entire variable annuity business. Although $40 billion is still relatively small compared to the $310 billion (2022) overall annuity business, the growth of this product line has been outstanding and will continue to be.
These annuities very much resemble indexed annuities where they are linked to some sort of an index, they have some level of downside protection, and most of the time have no explicit fees. This is very different than traditional VAs that invest the clients’ money in various subaccounts/mutual funds that can come along with significant fees (subaccount, M&E, rider). There are certainly more similarities between RILAs and fixed indexed annuities than there are between RILAs and traditional variable annuities.
What about the differences? A few of the differences between RILAs and fixed indexed annuities are:
- It is possible to lose money with most of these products, versus an indexed annuity—where you cannot get a negative return. For example, one such product has a floor of -10 percent, which means you can lose up to 10 percent of your money. (Note: there are products that have zero percent as a floor. Many times, you can choose your floor.)
- As a trade-off to being able to lose some money, the caps and/or participation rates are generally higher than what you see in the indexed annuity world.
- These products are registered as securities because of the fact that you can lose money on them. This means that only reps that have a securities license can sell these products.
Although there are various flavors of RILAs as well as many different options within each RILA, to simplify it I would break RILAs down into two main categories—those RILAs that have “floors,” and those RILAs that have “buffers.”
For those that have a floor, the floor is the maximum amount a consumer can lose. Some RILAs give you various options on the level of floor that you would like. Generally, the more money the client can lose, the higher the cap/par rate is. For example, one option may be where you have a floor of -10 percent and have a cap of 15 percent. This means that if the market drops 15 percent, you only lose 10 percent. However, if the market goes up, you can get up to 15 percent. There may be another option in the product that has a floor of -20 percent. So, you have the possibility of losing more money if the market should tank but this generally means that you would have a higher cap, 20 percent as an example.
Instead of a floor, there are RILA options that provide buffers. A buffer means that if the market drops, then the insurance company absorbs the first X percent of that drop. Then, anything beyond that buffer, the client will participate in. For example, if a client has a 10 percent buffer but the market drops 15 percent, the client will only experience a five percent loss. The higher the buffer is, the less the cap/participation rate is to the upside.
What are the additional fees?
When I explain to my agents how the products work and also that they are a subcomponent of variable annuities, they always respond with, “There have to be fees attached to these…” Also, when an agent sees a cap of 15 or 20 percent, they are taken aback because fixed indexed annuities have caps of 10 to 12 percent today on the high end. So, again, “There have to be fees attached to these…”
My answer to the fee questions is: There generally are no explicit fees associated with these annuities, just like how fixed indexed annuities have no fees. (Note: Exceptions are when a certain strategy might have a “strategy fee.”)
The next response is, “Then how are the insurance companies able to do this?” This is where I will refer you to my other article in this month’s edition entitled, RILAs: How Do Insurance Companies Do It?