RILA: Registered Index-Linked Annuities Explained | Buffers, Caps, Hidden Costs
If you've been following financial news lately, you've probably heard about RILA—the acronym taking the retirement world by storm.
RILA stands for Registered Index-Linked Annuity (also called "buffered annuities" or "structured annuities"). This product is exploding in popularity for one simple reason: it participates in stock market growth with downside protection.
But is it too good to be true? Let's break down what RILAs really are, how they work, and most importantly—what you're actually paying for them.
The Numbers Don't Lie: RILA Sales Are Exploding
Record-Breaking Sales in 2025
- Q3 2025 alone: RILA sales hit $20.7 billion, up 20% year-over-year[^1]
- First 9 months of 2025: Total RILA sales reached $57.4 billion[^1]
- Total annuity market: The broader market hit $347 billion through Q3 2025[^1]
What Exactly Is a RILA?
Think of a RILA as a "stock market ticket with an airbag."
A RILA is a tax-deferred annuity that:
- Links returns to a market index (typically S&P 500, NASDAQ, or others)
- Provides downside protection through a "buffer" or "floor"
- Limits upside gains through a "cap" or "participation rate"
- Does NOT guarantee 100% principal protection (unlike Fixed Index Annuities)
What Does "Registered" Mean in RILA?
"Registered" means the product is registered with the SEC as a security.
1. More Disclosure - Detailed prospectus about fees, risks, mechanics
2. Stricter Sales Standards - Advisors need securities licenses
3. Investment Risk - SEC classifies RILAs as investments (you bear market risk)
4. Additional Oversight - Both state insurance AND securities regulators oversee
The Four Key Components
1. Buffer (Floor)
Your downside protection—the insurance company absorbs losses up to a percentage.
Common options:
- 10% buffer (less protection, higher cap)
- 15% buffer
- 20% buffer
- 30% buffer (more protection, lower cap)
Critical: If the market falls more than your buffer, you absorb additional losses. A 20% buffer doesn't cap your losses at 20%—it means the first 20% is covered.[^2]
2. Cap (or Participation Rate)
Limits your upside.
Some RILAs use participation rates instead—e.g., 75% participation up to cap.
3. Crediting Period (Term Length)
RILAs operate in fixed terms:
- 1 year
- 3 years
- 6 years
At term end:
- Gains are locked in and protected
- You choose new terms/rates for next period
- You may withdraw without penalty
4. Index Options
Most RILAs offer multiple choices:
- S&P 500 (most common)
- NASDAQ-100
- Russell 2000
- Multi-index strategies
- Custom indices for specific volatility profiles
How It Works?
You invest $100,000 in a RILA with:
- Upside Cap: 15%
- Downside Buffer: 20%
- Term: 6 years
Scenario 1: Bull Market
S&P 500 rises 25%
- Your return: 15% (capped)
- Your account: $115,000
Scenario 2: Bear Market
S&P 500 falls 35%
- Your return: -15% (you absorb losses beyond 20% buffer)
- Your account: $85,000
Fees That RILAs MAY Have
Rider Fees (Optional) - If you add guaranteed lifetime withdrawal benefit (GLWB) or other rider: 0.50-1.50% annually
Surrender Charges - If you withdraw more than penalty-free amount (typically 10% annually) during surrender period (5-10 years): 5-10% penalties
Administrative/Contract Fees - most RILAs do NOT. Some carriers charge flat annual fee: $0-$50/year
Investment Management Fees - most RILAs do NOT (you're not in actual funds), but some strategies may charge 0.50-1.50% annually.
Mortality & Expense (M&E) Charge - most RILAs do NOT
The 5 Hidden Costs You Must Understand
YES. Even with "no fees," you're paying. Here's how:
1. The Cap/Participation Rate Spread
If a RILA offers 12% cap when market could deliver 20%, that 8% difference is effectively your "fee."
2. Opportunity Cost of No Dividends
S&P 500 pays approximately 1.4-2.0% in dividends annually.
RILAs track price returns only, not total returns. You don't receive dividends.
3. Surrender Charge "Lock-Up" Cost
Money is illiquid for 5-10 years with steep penalties (5-10%).
- Can't access funds for emergencies without penalty
- Can't reposition if better opportunities arise
- May be forced to hold even if underperforming
4. The Reset Risk
At each term end (e.g., 6 years), your cap rate resets based on current market conditions.
Risk: If interest rates have fallen, your new cap might be much lower.
Example:
- Year 1-6: 15% cap
- Year 7-12: 8% cap (due to lower rates)
You're locked in at new terms or face surrender charges to exit.
5. Tax Inefficiency (If Held in Taxable Account)
Gains taxed as ordinary income (up to 37%) rather than capital gains (15-20%).
Hidden cost example:
- $50,000 gain in stocks: $7,500-$10,000 tax
- $50,000 gain in RILA: $12,000-$18,500 tax
Additional Tax Considerations
No Step-Up in Basis at Death
- Stocks: Heirs get "step-up" and pay NO capital gains tax
- RILA: Heirs pay ordinary income tax on ALL gains (no step-up)
No Tax-Loss Harvesting
- Stocks: Sell losers to offset gains
- RILA: No ability to harvest losses; locked in
RILAs are much more tax-efficient when held in retirement accounts.
The Bottom Line
RILAs can be valuable tools for the right investor in the right situation, but they're not free money and they're not risk-free.
Sources and Additional Resources
[^1]: LIMRA. (2025). "Quarterly U.S. Retail Annuity Sales Top $120 Billion For the First Time." LIMRA Newsroom.
[^2]: iCapital. "Exploring Registered Index-Linked Annuities (RILAs)."
For More Information:
- FINRA Investor Alerts: www.finra.org/investors
- SEC Investor Information: www.investor.gov
- State Insurance Department (verify carrier ratings)
Disclaimer: This article is for educational purposes only and does not constitute investment, tax, or legal advice. Annuities are complex products with significant fees, restrictions, and risks. RILA products vary widely by carrier and contract terms. Before purchasing, consult with qualified financial advisor, insurance professional, and tax advisor to ensure product aligns with your specific situation, goals, and risk tolerance. Past performance does not guarantee future results.
