Fixed Index Annuity vs Registered Index-Linked Annuity

Today’s topic is Fixed Index Annuities versus Registered Index-Linked Annuities, also called FIAs vs RILAs.

You might not be ready for what I’m about to tell you, but it’s the truth.

Let’s start with the basic difference between these two products.

A Fixed Index Annuity requires a state life insurance license to sell.

A Registered Index-Linked Annuity, or RILA, requires a securities license, typically a Series 7 or equivalent.

That alone should tell you that these two products operate in different parts of the financial industry.

Key Takeaways

• Fixed Index Annuities require a state life insurance license to sell
• RILAs require a securities license such as a Series 7
• Fixed Index Annuities provide 100% principal protection
• RILAs require investors to share in some downside risk
• I focus on contractual guarantees only, not hypothetical market returns

Fixed Index Annuities Are Principal Protection Products

A Fixed Index Annuity protects your principal.

There is zero downside risk to your principal.

These products were put on the planet in 1995 to compete with CD returns, not market returns.

Historically, that’s exactly what they’ve done.

They have performed like CD-type products, not stock market investments.

Do we use them?

Yes.

But typically only when we attach an Income Rider to provide lifetime income in the future.

When I look at an Indexed Annuity, I’m not looking at potential market growth. I’m looking at the contractual income guarantee.

What a Registered Index-Linked Annuity Is

A Registered Index-Linked Annuity, or RILA, is a different animal.

It requires a securities license to sell.

Unlike Fixed Index Annuities, RILAs do not provide full principal protection.

You share in some of the downside risk.

That’s why I call them copay annuities.

With a RILA, you’re essentially paying for different levels of downside protection. The less downside you want to take, the more it typically costs.

Why I Focus on Contractual Guarantees

I’m the pioneer of something called CGO — Contractual Guarantees Only.

That means I don’t look at:

• hypothetical projections
• theoretical returns
• back-tested numbers

I only focus on what the contract guarantees.

In my opinion, you should never buy an annuity for potential market growth.

If you want market growth, go directly to the market.

Why We Use Indexed Annuities for Income Riders

Indexed Annuities can be useful when they are paired with Income Riders.

The rider provides a future lifetime income guarantee.

The rider can’t be purchased by itself. It has to ride on top of an annuity policy.

From an efficiency standpoint, Indexed Annuities often serve as the vehicle to deliver that guarantee.

When we quote those products, we are not focusing on the growth side.

We are focusing on the contractual income payout.

RILAs vs Indexed Annuities for Market Growth

If you ask me which one I would choose purely for market growth, my answer is simple.

Neither.

Both products limit the upside.

If someone wants market growth, then they should just invest directly in the market where there are no artificial limitations.

The Two Questions That Always Matter

When evaluating annuities, I always start with two questions.

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

I also use the acronym PILL to explain what annuities solve for:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

Notice something.

There is no G for growth.

There is no M for market.

And there never will be.

The Bottom Line

Both Fixed Index Annuities and Registered Index-Linked Annuities are often pitched using market language.

But they are very different products.

Fixed Index Annuities provide principal protection and contractual guarantees.

RILAs introduce shared downside risk in exchange for some potential upside.

In my opinion, annuities should always be evaluated based on contractual guarantees, not market projections.