RILA vs. Variable Annuity

Choosing between a RILA or variable annuity requires understanding their key features, benefits and potential trade-offs.

A registered index-linked annuity, or RILA, is a type of annuity linked to a market index, such as the S&P 500, and protects your losses through a buffer or floor. If you choose a buffer, your life insurance company absorbs up to a certain percentage of the losses your RILA takes on. A floor, on the other hand, limits up to a certain percentage of the losses you absorb. Also, RILAs often come with a cap, trigger or participation rate that limits how much they can earn in a year.

Typically, a variable annuity lets you invest your contributions into a variety of options such as ETFs, indexed portfolios, stocks and bonds. Your returns grow tax-deferred and provide periodic income payments. Unlike RILAs, variable annuities usually don’t have options for capping your losses, making them a riskier investment.

RILAs and variable annuities differ in their risk levels, growth potential and flexibility. Here’s how they compare.

RILAs typically have less growth potential than variable annuities because the securities you invest in tend to provide smaller returns. Also, RILAs usually require you to choose between three features that cap your earnings: a cap, trigger or participation rate.

Caps are straightforward—if your RILA’s cap is 10%, the most it can earn in a year is 10%.
Triggers are more complicated. A trigger typically has a trigger percentage and threshold percentage. Once your RILA hits its threshold percentage, it “triggers” an earning rate. So, if your RILA’s threshold is 1% and its trigger rate is 10%, it would earn 10% when its returns hit 1%.

A RILA participation rate is a percentage that represents how much of your RILA’s growth goes toward your principal. If your RILA’s participation rate is 20% and it earns 10% in a year, your returns are 2% (20% of 10%).

“Some insurers offer enhancement riders that boost your RILA’s participation rate or cap,” said Michael Rosenberg, managing director at New Jersey-based Diversified Investment Strategies.
“A standard no-cost RILA contract might offer a 100% participation rate on an equity index, such as the S&P 500,” Rosenberg said. “With an enhancement, the participation rate can increase to 120% to 130%.”

Variable annuities have no caps on returns—their performance depends on the investments you pick.

Because your variable annuity’s returns are based on how the market does, there’s a potential for more growth than what you could earn through a RILA, said Walter Russell, president of Russell and Associates in New Albany, Ohio. “VAs give you access to a wide range of investment options, which can yield significant growth over time,” he says.

However, the potential for significant growth comes with the risk of significant losses if your investments perform poorly.

When you buy a RILA, you’ll likely get to choose between two features that limit your losses: a buffer or floor.

Buffers are a percentage-based figure that represents the losses your insurer absorbs before they impact your returns. For example, say your RILA’s buffer is 8%, and the RILA loses 10% in a year. In this case, your insurer would absorb 8% of the losses and your RILA would drop 2%.

A RILA’s floor is the opposite of a buffer. The floor’s percentage represents the losses you take on before your insurer absorbs them. So, if your floor is 8% and your RILA loses 10% in a year, your RILA would decline 8% and your insurer would absorb the remaining 2%.

Variable annuities present more risk than RILAs. Your investment is fully exposed to market volatility. So, if the market tanks, you could be in for significant losses.

“Unlike RILAs, VAs expose you to the full extent of market losses, which can be stressful during downturns,” Russell said.

That being said, variable annuities offer lower-risk investment options such as fixed-income assets or money-market instruments. While the risk is lower, the opportunity for big returns is lower, too.

RILAs’ cap, trigger and participation rates, along with their buffers and floors, offer flexibility if you’re comfortable with lower returns in exchange for limits on losses.

While RILAs offer a lot of flexibility for limits on gains and losses, variable annuities provide flexibility for how you invest your money. Your investment options are more varied than what you can get with an RILA.

In general, RILAs have more liquidity than variable annuities. There are no withdrawal limits, and insurers usually offer riders you can purchase that make it easier to withdraw money when you need it. However, if you make a withdrawal within the first six to 10 years of owning your RILA, you’ll probably have to pay an early withdrawal fee.

Variable annuities may let you borrow against your account, but each insurer has its own specific terms. Be sure to understand these terms before taking a loan or making a withdrawal. Typically, you can also purchase a rider that provides better withdrawal options.

That being said, some variable annuity contracts offer limited yearly withdrawals, such as 10% of the account’s value, or limits on one-time withdrawals, such as $250,000.

RILAs generally have lower fees compared to variable annuities. Costs may include administrative fees for contract maintenance, although not every issuer will charge them. As with other annuities, you’ll usually face surrender charges if you make a withdrawal within the first six to 10 years of owning the annuity.

On the other hand, variable annuities typically have more fees than RILA, such as administrative fees, fund management fees, a mortality and expense fee, annual fees and optional fees for riders. Taken together, these fees can cut into your return. An early withdrawal may trigger a surrender charge, usually in the range of 5% to 7% in the first year, although that declines yearly until the surrender period ends.

Editor Norah Layne contributed to this article.