What Is a Structured Annuity? How Do They Work?

Structured annuities, often presented as Registered Index-Linked Annuities (RILAs) and Buffer Annuities, are retirement-focused financial products. Insurance companies issue them and offer investors principal protection against market downturns while providing market-linked growth opportunities. They are not related to structured settlement annuities.

Structured annuities can be intriguing for investors looking to balance growth and protection. They are different from traditional annuities in that they provide a "structure" within which there is upside growth of your money (typically driven by the performance of a market index) but can also protect your principal investment from losses.

Structured Annuities are Not the Same as an Annuity From a Structured Settlement

Structured annuities and an annuity from a structured settlement are completely unrelated concepts, each associated with distinct financial arrangements. Let's clarify the differences between the two:

1. Structured Annuity: As we mentioned, a structured annuity is a type of retirement planning product that offers buyers a balance between principal protection and potential market-linked returns. The structured annuity allows investors to participate in market gains while protecting against market downturns. It is an annuity product.

1. Annuity from a Structured Settlement: When you receive an annuity from a structured settlement, it is typically a result of legal judgment, often related to a personal injury lawsuit or other legal claims. When a settlement is awarded, the recipient may choose to receive the funds through periodic payments rather than a lump sum. These recurring payments are structured as an annuity, providing a steady income stream over a specified period. 

In summary, a structured annuity is purchased from an insurance company (usually from a licensed agent or financial advisor) as a retirement planning vehicle. It offers the potential for growth and principal protection.

Conversely, an annuity received as part of a structured settlement is usually a result of a legal settlement. It is designed to provide periodic payments to the recipient.

Structured annuities come in two varieties with slightly different features: RLIAs and Buffer Annuities. Here are some details:

What is a RILA?

Registered Index-Linked Annuities (RILAs) returns are tied to the performance of a specific market index, such as the S&P 500. RILAs allow investors to participate in market gains up to a certain cap while protecting against significant market downturns, usually represented by a floor. This ensures that the downside impact on your principal deposit amount is limited if the market declines. RILAs offer a balance between market-linked returns and downside protection.

RILAs may be a good option for investors who want the potential for market-linked returns and some protection against significant market downturns. The floor on losses feature of RILAs provides the buyer with some principal protection.

What is a Buffer Annuity?

Buffer annuity returns are also linked to the performance of a market index but offer a buffer or cushion that allows investors to absorb a certain percentage of losses incurred by that index if they occur. Buffer annuities also cap your earnings if the market index does well. These products are similar to indexed annuities, as they offer some protection against losses and cap the return you can earn over a specific period. Buffer annuities usually offer higher market participation upside than indexed annuities but provide less protection against losses.

For example, suppose the insurance company offers a 5% loss buffer. In that case, the company covers the first 5% of any market loss, and this loss percentage will not impact your balance. Anything beyond the 5% threshold would impact your investment. Conversely, if your buffer annuity had a 10% cap, your gains would be capped at that amount, even if the investment index grew by more than 10%. In this scenario, the life insurance company reaps the benefits of gains above 10%.

Buffer annuities may be a good choice for moderately aggressive investors looking for a middle ground between the security of fixed annuities and the growth potential of variable annuities. While there is protection against market losses up to a specific buffer level, there is also a limited ability to capture gains when the market performs well.

Buffer Annuities and RILAs Compared to Traditional Fixed Annuities

Buffer annuities, RILAs, and traditional fixed annuities are all types of annuity products. Still, they have distinct features and serve different purposes. Let's compare:

Market Exposure

Buffer Annuities: Protect against market fluctuations up to a specified buffer. Investors absorb a certain percentage of market losses and have a cap on any gains represented by the index during a specified period.

RILAs: Offer returns linked to the performance of a specific market index, such as the S&P 500. Like buffer annuities, investors can benefit from market gains, which are subject to caps, while having a floor to protect against significant losses.

Fixed Annuities: The issuing insurance company invests money on your behalf and provides a fixed interest rate guaranteed for a specific period, offering stability without direct participation in the stock market.

Upside Potential

Buffer Annuities: Offer potential for market-linked returns, but gains are capped. Investors benefit from favorable market performance up to a specific limit.

RILAs: Provide the potential for higher returns than traditional fixed annuities, but market gains are typically subject to a cap like buffered annuities.

Fixed Annuities: The interest rate is predetermined and guaranteed by the issuing insurance company and remains unchanged throughout the guaranteed period. There is no upside potential.

Flexibility

Buffer Annuities: These are more flexible than traditional fixed annuities, as they allow for some exposure to the stock and bond markets.

RILAs: Offer investment flexibility in terms of potential market-linked returns. The returns are tied to an index, providing a variable element to the annuity.

Fixed Annuities: These are more rigid than RILAs and buffered annuities, offering a stable and guaranteed return without exposure to market volatility.

Risk Profile

Buffer Annuities: Appropriate for investors who want to balance downside protection and the possibility of limited market-linked gains. They are suitable for those willing to accept a controlled level of risk.

RILAs: Like buffer annuities, RILAs are suitable for investors seeking a balance between market-linked returns and downside protection. They are ideal for those comfortable with some market exposure within defined guidelines.

Fixed Annuities: These suit conservative investors who want safety and predictable income. They are a lower-risk option compared to RILAs and buffer annuities.

Liquidity

Buffer Annuities: Typically have surrender charges or withdrawal restrictions, especially during the contract's early years, limiting liquidity.

RILAs: Also have surrender charges with limited liquidity options.

Fixed Annuities: They may have surrender charges for early withdrawals but generally have more predictable and flexible withdrawal options than buffered annuities or RILAs. For example, Canvas annuities allow up to 10% of your balance to be withdrawn yearly without penalties.

Is a Structured Annuity Right for Me?

With any retirement plan, diversification is a solid strategy. As an investor, it's a great idea to have various products in your retirement portfolio that reflect your comfort with risk and desire for growth. Structured annuities can play a role in this diversification strategy, especially for people who want to participate in market gains while limiting the potential for losses. Including a financial professional in the discussion is a good idea because these products can be complex.

For many savvy investors, having a guaranteed component to your portfolio, like fixed annuities or CDs, can provide a foundation to build other retirement products. Investors often choose fixed annuities as they near retirement and are looking to preserve assets while guaranteeing modest growth. As you build out your portfolio, remember that annuities are the only product that can provide a guaranteed stream of income that you cannot outlive.

Final Thoughts

Structured annuities are relatively complex retirement planning products that can play a role in some investors' portfolios, especially those looking for more upside than fixed return products while tempering the potential for losses. More conservative investors might consider fixed annuities as an alternative to complex structured products.

Fixed annuities offer guaranteed returns and very competitive rates of return in the current market. Some companies, like Canvas annuities, also provide access to withdrawals during the guarantee period. Canvas annuities can be purchased 100% online or over the phone with a knowledgeable, licensed agent. Check out the current rates at www.canvasannuity.com