Registered Index-Linked Annuity (RILA)

A registered index-linked annuity, or RILA, is a type of annuity that accumulates value based on the performance of an equity market index.

RILAs are similar to indexed annuities, which also measure index performance to determine the value earned. However, a RILA lacks some of the features of indexed annuities. Most importantly, RILAs do not have full principal protection like indexed annuities do.

Because they don’t have principal protection, RILAs are considered more risky than fixed or indexed annuities. However, they also offer greater participation in the investment market, which means the return potential of RILAs may exceed that of more conservative annuity types.

RILAs gained significant popularity in 2024, with total sales forecasted to reach $60 billion that year. The product may have gained favor among investors seeking an alternative to fixed return products after the Federal Reserve’s 2024 rate cuts. The increased market volatility from COVID-19 and beyond may also have motivated some more risk-tolerant investors to seek out a variable return product with some level of protection, like a RILA.

RILAs work by participating in the performance of an equity market index, such as the S&P 500. When you purchase the RILA, you can choose which index your annuity will track, what level of participation the annuity will have and how often any growth will be credited to the annuity.

The performance of the chosen index as well as the details of the crediting strategy determine how much a RILA will grow. If the index increases in value during the crediting period, then the RILA’s value also increases, but if the index loses value, the RILA may also lose value.

However, the value of a RILA isn’t completely susceptible to the performance of the index. These annuities come with some form of protection against loss; it might be a floor that creates a lower boundary for how much value the RILA can lose, or a buffer that reduces the percentage lost before crediting any remaining negative value to the annuity.

In order to offset the burden of this downside protection, RILA issuers also place limits on the upside potential of the RILA. One way this might be accomplished is through a cap rate that places an upper boundary on how much of the index’s growth can be credited to the annuity.

For example, a RILA might have a rate cap of 8%. If the linked index performs extremely well and its value increases by 14%, the RILA only gets credited the maximum 8% in growth.

One of the main benefits of a RILA is the ability to participate in the market without being totally exposed to loss. You can reap the benefits of a strong market through index gains, and in years that the market performs poorly, your money is partially shielded from losing value.

However, the tradeoff to this protection is an upper threshold of how much value you can earn, even in years when your linked index performs exceptionally well. There is also the risk that if your linked index loses a significant percentage of its value, your contract’s downside protection won’t be enough to prevent your annuity from losing value.

RILAs are best suited for those who want to accumulate savings for retirement but aren’t looking to establish retirement income right away. You need to have a long enough time horizon that your RILA can weather the ups and downs of the market and come out ahead.

You may choose a RILA if you are seeking a middle ground between fixed annuities, which provide a guaranteed rate of interest, and variable annuities, which are invested in portfolios of investments.

In general, the more risk a financial product has, the greater its return potential. Fixed annuities are very safe investments, with principal protection and guaranteed returns, but the rates on fixed annuities might not be enough to keep pace with inflation. Variable annuities have the potential to gain a lot of growth if the underlying portfolio performs well, but they do not have as much protection against market losses.

A RILA strikes a balance between risk and reward. These products earn variable interest based on the underlying index, but they aren’t fully invested in the market. And while RILAs do come with some risk, they offer a measure of downside protection in the form of a rate floor or buffer.

When choosing the best RILA for your needs, you might first consider what term length fits best with your financial goals. RILA terms can range from one year to six years, and they can often be renewed once the term is over with new indexing options.

You’ll also want to research the different indexing options offered by each RILA product. Some products might have more generous participation rates or higher rate caps, while other RILAs might provide greater downside protection. You’ll have to compare the products and decide which features are most important for your objectives.

Besides researching different products, you should also do some research about different RILA providers. When shopping for different annuity providers, you should always research the financial strength ratings, which are scores assigned by third party agencies to signify the company’s overall financial stability.

Annuities and the income stream they can provide are not insured by the FDIC, so any guarantees in the contract are only backed up by the financial strength of the insurer. That’s why it’s so important to only purchase annuities with credit ratings of B+ or better.

Editor Norah Layne contributed to this article.