These annuities act like ‘bumpers in a bowling lane’ to limit losses, advisor says: What to know before you buy one

Registered Index-Linked Annuities (RILAs) are experiencing substantial growth, with sales reaching $20.6 billion in Q3, a 20% year-over-year increase, and projected to exceed $80 billion by 2026. This surge is driven by investors seeking buffered market exposure, offering limited downside protection and capped upside gains, amid concerns about a mature bull market cycle and the need for inflation-beating returns. While RILAs provide risk mitigation and typically have no upfront fees, they involve liquidity constraints and potential for losses beyond protection limits in severe downturns, reflecting a broader investor demand for structured products balancing growth and capital preservation.

Analysis

Registered Index-Linked Annuities (RILAs) are experiencing substantial growth, with Q3 sales reaching $20.6 billion, a 20% year-over-year increase, and year-to-date sales at $57.3 billion. LIMRA projects sales to exceed $80 billion by 2026 and 2027, driven by investor demand for buffered market exposure amidst concerns about a mature bull market cycle. This growth reflects a cautious investor sentiment following an S&P 500 climb of over 85% since October 2022.

RILAs offer a unique structure, providing limited downside protection while capping upside gains, akin to "bumpers in a bowling lane." They typically come with no upfront sales charges or investment fees, making them attractive for investors seeking market exposure without direct ownership of underlying indexes. Diversification can be achieved by basing contracts on multiple indexes.

However, RILAs are not without significant risks and limitations. Upside caps inherently blunt market gains, and while they limit losses, severe market downturns (e.g., S&P 500 >50% in the Great Recession) can still result in capital loss beyond the protection limits. Furthermore, these products involve liquidity constraints due to surrender charges for early withdrawals and are subject to age-related tax penalties before 59½, similar to other retirement accounts.

Key Decisions for Investors

• Investors should evaluate RILAs as a tool for portfolio risk mitigation and buffered market exposure, particularly in a late-stage bull market environment.
• Carefully assess the specific loss limits, upside caps, and underlying index choices of any RILA product, understanding that severe market downturns can still lead to capital loss beyond stated protections.
• Consider the long-term liquidity implications and potential surrender charges associated with RILAs, ensuring alignment with personal financial planning and withdrawal needs.