Is a RILA a Variable Annuity? What the SEC Says

A registered index-linked annuity is not a variable annuity, but the SEC regulates it as one. A RILA registers as a security under the same federal framework that governs traditional variable annuities and is sometimes marketed as an “index-linked variable annuity.”¹ In practice, though, the two products work differently. A RILA links your returns to a market index, caps both your potential gains and your potential losses, and uses a different account structure than a traditional variable annuity.

Why the SEC Groups RILAs With Variable Annuities

Federal securities law exempts certain annuities from registration when the insurance company, not the buyer, assumes the investment risk. A RILA shifts a meaningful portion of that risk to you through its buffer or floor design, so it does not qualify for the exemption and must register with the SEC.²

The SEC requires insurers to register RILA offerings on Form N-4, the same form used for traditional variable annuities.² That shared paperwork is one reason the products get grouped together. The SEC itself describes a RILA as “a type of indexed annuity that is a security,” and the same product may also be called a structured annuity or a buffered annuity.¹ A RILA sits in a middle ground: regulated like a variable annuity, built more like a structured product with defined loss limits.

How the Two Products Actually Differ

How Your Return Is Calculated

In a traditional variable annuity, your money goes into subaccounts that behave like mutual funds. Your contract value moves up or down every day with the value of those subaccounts, and there is no cap on what you can earn or lose.

A RILA works on a term basis. Your return is tied to the performance of a market index, such as the S&P 500, over a set period called the index term. Terms are commonly one, three, or six years. Your account is not marked up or down daily. Instead, the return is credited at the end of the term and is shaped by two levers the insurer sets in the contract:

A cap, which is the maximum return for the term. If the cap is 10% and the index rises 15%, you receive 10%.
A participation rate, which is the percentage of the index return you keep. If the index rises 10% and your participation rate is 80%, you receive 8%.

One detail worth checking in the prospectus: insurers typically measure the price return of an index, which excludes reinvested dividends. The S&P 500’s price return is lower than its total return for that reason.²

How Losses Are Handled

This is the sharpest difference. A traditional variable annuity exposes you to the full loss of whatever subaccounts you pick. Loss protection is available only by buying an optional rider for an extra fee.

A RILA has loss limits built into the contract. You typically pick from two structures:

A buffer, where the insurer absorbs the first portion of any loss. With a 10% buffer, an 8% index drop costs you nothing, and a 15% drop costs you 5%.
A floor, which caps your maximum loss. With a −10% floor, a 30% index drop still costs you only 10%.

Both protections apply at the end of the index term. Take money out early and the insurer instead uses an interim value calculation, which can produce a bigger loss than the buffer or floor would suggest.³

Account Structure

Traditional variable annuities place your money into separate accounts that function like mutual fund subaccounts. You choose the specific investment options, and those separate accounts are legally insulated from the insurer’s general creditors, so your assets are protected if the insurer runs into financial trouble.⁴

RILAs also use separate accounts, but they are non-unitized. The insurer manages the underlying investments at its own discretion, typically through options and other derivatives that hedge the index-linked returns the contract promises. You do not own subaccount shares. Because the payout depends on the insurer’s hedging and its own promises, the financial strength of the issuing company matters more than it does with a traditional variable annuity where your money sits in segregated subaccounts.

Fees

Fee structures diverge as well. A traditional variable annuity typically charges an explicit mortality and expense (M&E) risk charge, often around 1.00% to 1.50% a year, plus the investment management fees on each subaccount.

Many RILAs do not charge a separate M&E fee on their index-linked options. The insurer’s costs and profit are embedded in the cap and participation rate: the gap between what the index actually returned and what you receive covers them. Some RILAs do impose explicit annual fees, and contracts that offer a variable subaccount option alongside index strategies may apply an M&E charge to the variable portion. The fee table in the prospectus is the place to confirm which model your contract uses.

What Carries Over From Variable Annuities

Several features work the same way in both products.

Tax treatment is identical. Your money grows tax-deferred. Withdrawals from a non-qualified contract come out gains-first under last-in, first-out ordering, and those gains are taxed as ordinary income rather than at the capital gains rate. Take money out before age 59½ and you owe a 10% additional tax on the taxable portion, on top of ordinary income tax, subject to exceptions such as death or disability.⁵ With a RILA, an early withdrawal can also trigger a surrender charge from the insurer on top of the IRS penalty.

Death benefits look similar too. Most RILAs include a standard return-of-premium death benefit at no extra explicit charge, ensuring beneficiaries receive at least the amount originally invested minus prior withdrawals, even if the contract’s current value is lower. That mirrors the standard death benefit on a traditional variable annuity. Enhanced options such as a highest-anniversary-value guarantee exist but are less common in RILAs.

The sales channel overlaps as well. Because both products are registered securities, anyone selling one has to hold both a state insurance license and a securities registration, typically a Series 6 or Series 7.⁶ Every RILA arrives with a prospectus disclosing the index options, cap and participation rates, buffer and floor levels, surrender schedules, fees, and interim value methodology.

Liquidity and the Interim Value Problem

Both products restrict access to your money, but a RILA has an extra layer worth understanding before you buy.

Like variable annuities, most RILAs impose a surrender charge period of roughly three to ten years. Withdraw more than the contract’s allowance during that window and you pay a percentage penalty that starts higher in the early years and declines to zero. Many contracts let you take out up to 10% of the account value each year without triggering the charge.

The added layer is the index term itself. If you pull money out mid-term, whether through a withdrawal, surrender, or death benefit, the insurer calculates an interim value rather than applying the full buffer or floor. That interim value typically reflects the current market value of the hedges the insurer bought at the start of the term, plus a bond-like component for the remaining time. It can be significantly higher or lower than your original investment depending on market conditions, volatility, and interest rates. Leaving the money in the contract until the end of the term is how you get the full benefit of the loss protection you paid for.

A Note on Guaranty Association Coverage

State guaranty associations backstop policyholders when an insurance company becomes insolvent. Coverage for traditional fixed annuities is well-established because the full contract value sits in the insurer’s general account. Coverage for RILAs is less certain. Because a RILA transfers investment risk to the buyer and is regulated as a security, it may not receive the same level of protection as a fixed annuity. Rules vary by state and any applicable limits may not cover your full balance. Checking your state’s guaranty association rules and the issuing insurer’s financial strength ratings is the practical starting point before you commit funds.

1
U.S. Securities and Exchange Commission. Registered Index-Linked Annuity (RILA)
2
Securities and Exchange Commission. Final Rule – Registration for Index-Linked Annuities
3
U.S. Securities and Exchange Commission. Annuities
4
NAIC. Separate Accounts
5
Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
6
FINRA.org. Series 6 – Investment Company and Variable Contracts Products Representative Exam