SIE EXAM CANDIDATES, THINKING ABOUT SELLING RILAS TO CLIENTS IN THE FUTURE? THEN CAREFULLY CONSIDER THE VARIOUS CHARGES THAT RILA INVESTORS FACE!

Several weeks ago, Bob Eder's blog discussed RILAS or Registered Index Linked Annuities. In this blog Bob discusses the major penalties and charges that can reduce a client's return. These penalties include, but are not limited to, surrender charges; interim value adjustments and mid-term investment withdrawals; and tax penalties. This information is based on a publication of the SEC's Office of the Investor Advocate entitled "Report on Activities Fiscal Year 2023."

A "RILA" has both insurance components and investment components. An investor puts money into a RILA, generally with a minimum requirement of $10,000 to $20,000.  After making this initial investment, the RILA purchaser then decides how much premium to put into investment options. These investments are relatively short-term, generally not exceeding six years. 

This short-term character of RILA investments means that the investment options generally will not exceed the life of the RILA contract itself. Each investment option is different and has different floors, buffers, caps and participation rates. Because of the different characteristics of investment options, the RILA investor is faced with being forced to change from one investment to another, each with different pitfalls and/or benefits.

1)    A RILA contract normally has a surrender penalty lasting from six to nine years. Surrender penalties are typically 9 to 10 percent and decrease over the minimum initial period. So if 20-year old Jimmy invests $100,000 into ABC RILA, and then withdraws all $100,000 during the first year of ownership, ABC RILA will return only $90,000, assuming it has a surrender penalty of 10 percent for the first year, all other charges not considered in this example.

2)    Jimmy will also face an "interim value adjustment," non-descriptive words for a penalty for withdrawing his monies from "Investment A" before the end of Investment A's six-year period. These penalties can be substantial. It is even possible that Jimmy can lose almost all of his investment. Note that a RILA can impose two separate penalties for early withdrawal, one for surrendering the RILA contract and a second one for withdrawing monies from the RILA's investment component.

3)    The third penalty would be imposed by IRS if Jimmy withdraws funds from the RILA prior to age 59 1/2.

What other type of investment offers the possibility of levying three different penalties upon a hapless owner?

If you plan to take the Securities Industry Essentials (SIE) Exam, please study both annuities and registered index-linked annuities (RILA).

Bob Eder discusses RILAs and Indexed Annuities in his Study for the Securities Industry Essentials (SIE) Exam.

Here is the link to FINRA's Content Outline for the SIE Exam. See the references to Annuities in Section 2.1.4. 

Study for the Securities Industry Essentials (SIE) Exam is available from Amazon in both paperback and Kindle e-book versions. 

Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Study for the Securities Industry Essentials (SIE) Exam, or questions in general about the SIE Exam, or about Annuities and RILAS, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. 

See Bob Eder's Author Page on Amazon.com.

P.S. Please consider reviewing Bob Eder's Study for the SIE Exam on Amazon. Your opinion matters!