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According to LIMRA, registered index-linked annuities (RILAs) sales for the first half of 2021 were 105% higher than the same period in 2020. They have maintained a 38% compound annual growth rate since they were introduced over 10 years ago1.
What’s behind the popularity of this relatively new product?
The financial industry is always evolving to meet changing consumer demands. The arrival of fixed indexed annuities (FIAs) in the mid-1990s filled a gap in the annuity-risk spectrum, responding to the call for growth potential beyond a simple fixed rate of return while providing guaranteed protection from loss due to market downturns. RILAs, also known as buffered annuities, structured annuities, and variable-indexed annuities, joined the party in 2010. By addressing the increased demand for higher accumulation potential with managed market risk, they have been gaining popularity for the last decade.
RILAs are hybrid of an FIA and a variable annuity (VA). While the majority of FIAs are designed with income in mind, RILAs are designed with specific features to promote greater asset growth potential while providing a level of protection from volatile markets. In fact, RILAs offer the highest accumulation potential of any risk-managed annuity product.
Who are RILAs right for?
While typically overshadowed by the older baby boomers and younger millennials, Gen X represents a smaller percentage of the population but holds a high portion of wealth.
As a smaller and younger demographic, their collective wealth logically lags baby boomers. However, Federal Reserve data shows Gen X is catching up to their older predecessors. In fact, Gen X’s share of household net worth recently surpassed their share of households. Plus, they’ve seen their wealth increase in recent years and have plenty of time prior to retirement.
Gen X has been through it all; from the stock market highs of the 1990s to the market recessions of 2001 and 2008. Their experience with both the highs and lows of the market, combined with today’s low rates and their time left prior to retirement, make RILAs a strong match. Gen Xers need a chance at higher growth to maximize their remaining years of retirement saving. Plus, they may want a level of protection to manage anxiety over the risk of loss.
Volatility and persistently low interest rates stemming from the pandemic and economic conditions have contributed to the growing popularity of RILAs. Faced with a complex planning environment, investors may be more likely to seek risk-managed products to help protect what they’ve gained while achieving strong accumulation potential to maintain asset growth. These lingering fears and feelings of uncertainty have created an opportunity for change, accelerating the need for RILAs in the marketplace and furthering a shift toward accumulation in the annuity industry.
Benefits of RILAs
The benefits of RILAs can be broken down into three main factors. RILAs help investors increase growth potential with index-linked performance by earning interest credits based partly on the up and down movements of an external stock market index while possessing a special feature – cap and participation rates – which may limit the amount credited.
RILAs are built with mechanisms such as buffers and floors which allow investors to pursue growth potential while having a measure of protection from loss due to market downturns based on their individual tolerance for risk. Aside from managing the risk of market downturns, RILAs also help manage the risk of inflation. Instead of putting their money in options with zero risk of loss, RILAs can reduce the risk of investors losing purchasing power by outpacing inflation.
Lastly, RILA investors do not have to pay taxes on growth until the money is withdrawn from the annuity, allowing deferred tax payments on growth and ensuring higher net returns.
RILAs may help meet the needs of Gen X investors by giving them the tools to manage market risks while enjoying robust growth potential and the benefits of tax deferral – empowering them to concur the unique challenges of today’s economic environment.
Chris Grady serves as executive vice president, head of U.S. distribution at Athene USA where he guides sales by creating partnerships with third-party distributors, overseeing and directing Athene’s wholesaling organization and collaborating with executives at partner distribution organizations.
If you would like any additional information on RILAs and how they can help your Gen X clients, please contact Athene USA at 888-266-8489.
1LIMRA Secure Retirement Institute, “U.S. Individual Annuities: 2020 Year in Review.”
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
