What to know before you buy one

Investors who want to benefit from stock market gains but limit the impact of its losses are increasingly turning to registered index-linked annuities.

Like other annuities, RILAs are insurance contracts that involve handing over money in exchange for a payout, often at a later date. As the name suggests, a RILA’s performance is based on a stock market index (or multiple indexes). They come with limits on both the loss and growth sides.

“It’s like putting bumpers in a bowling lane — you’re limited on both sides,” said certified financial planner Jessica McNamee, founder and wealth management advisor for Sirius Wealth Strategies in Bellefontaine, Ohio.

Sales of RILAs reached an estimated $20.6 billion in the third quarter, a 20% jump from the same period in 2024, according to recent research from LIMRA, an insurance and financial services trade group.

This year through Sept. 30, sales were 18% higher than the same time last year, at $57.3 billion. LIMRA expects sales to exceed $80 billion in both 2026 and 2027, said Keith Golembiewski, assistant vice president and head of LIMRA annuity research.

“With a growing number of income solutions and downside protection features … RILAs have become more appealing to a wider range of clients,” Golembiewski said.

The growth comes as the stock market has continued its upward climb over the last several years, with the major stock indexes posting double-digit yearly gains. The S&P 500 index, for instance, has climbed more than 85% since mid-October 2022. Some financial advisors are recommending that investors rebalance their portfolios and evaluate their risk tolerance in case there’s a market correction or worse.

“We are later in a bull run cycle,” McNamee said. “As time goes on, the potential gain from this bull market is diminished and the potential risk of a prolonged market dip is increased. I think clients are thinking, ‘How long can this [bull run] continue?’”

At the same time, investors who are still accumulating their retirement savings need exposure to the market if they want returns that beat inflation — and a RILA can help with that.

But they aren’t without risk. Here’s what to know before you buy.

Remember that those bumpers don’t just affect losses: “Your losses are limited to some extent and the gains are limited to some extent,” McNamee said.

While the specifics vary among RILAs, here’s an example: Say a RILA is based on the S&P 500 index and comes with a 15% downside limit and a 15% upside cap. If the S&P drops 8%, you won’t incur the loss. But if it slides by 19%, you’d see a 4% loss (the amount greater than the 15% loss limit).

On the gain side in that situation, if the market jumps by 20%, you’ll only see a 15% gain.

You can choose the length of the RILA contract — say, one, three or six years. There are also variations in the specifics of your loss limit and gain caps — both are generally larger the longer the contract — as well as the market index or indexes you choose to base your contract on.

Using more than one index in your RILA can help diversify your money. For instance, say you allotted 70% to the S&P index and the other 30% to a broad-based international index, McNamee said.

“If U.S. stocks go down but the rest of the world’s stocks are fine, that [index mix] helps to mitigate potential losses because we’re diversifying,” she said.

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One appealing aspect of RILAs is that they generally come with no fees. There’s no upfront sales charge when you enter the contract, nor are there investment fees — because even though your returns are based on the performance of an index, you don’t own the index, McNamee said. 

These annuities are not without risk. 

For instance, McNamee said, a RILA that covers up to 25% on the downside may seem generous, but history shows it can be worse: In the Great Recession, from late 2007 to early 2009, the S&P lost more than 50%.

“I remind clients that we could experience that again,” McNamee said. “It is possible for the index to fall more than that and you could lose money.”

In other words, it’s important to consider your risk profile before buying a RILA, she said.

“The client needs to analyze whether or not the allocation to an index is appropriate for their risk tolerance, even with the downside protection,” McNamee said.

Additionally, it’s important to remember that you are generally locking up your money for the duration of the RILA. If you withdraw money from the annuity before the contract ends, you may pay what’s called a surrender charge.

Some RILAs let you withdraw up to a certain amount yearly (say 10%) but will apply that surrender charge to any withdrawals beyond that limit, McNamee said. Those charges generally start out higher at the beginning of the contract (say, 8% of whatever you take out) and gradually get lower over the course of the RILA.

Beyond that lack of liquidity, it’s important to remember that RILAs, like other annuities, are subject to the same age-related withdrawal limitations as other retirement savings.

“The biggest mistake I see people make with annuities is they don’t realize that even if it’s funded with non-IRA money, it is still a retirement account,” McNamee said. 

So if you take money out before age 59½, you may be subject to a 10% early withdrawal tax penalty from the Internal Revenue Service.

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