Buffer

How Buffers Work

Buffers are what make RILAs unique. Unlike Fixed Index Annuities (FIAs) where you can't lose money at all, RILAs let you participate in some downside—but the insurance company absorbs the first portion of losses.

Think of it as downside protection with a deductible. You're exposed to losses beyond the buffer, but the insurance company takes the hit up to that point.

📊 Real Example: 10% Buffer in Action

Scenario: Lisa has a $150,000 RILA with a 10% buffer.

Market drops 5%:
→ Buffer covers all of it = Lisa loses $0

Market drops 10%:
→ Buffer covers all of it = Lisa loses $0

Market drops 15%:
→ Buffer covers first 10%, Lisa takes the remaining 5%
→ Lisa loses 5% of $150,000 = $7,500

Market drops 30%:
→ Buffer covers first 10%, Lisa takes remaining 20%
→ Lisa loses 20% of $150,000 = $30,000

Buffer vs. Floor (Key Difference)

Floor (FIAs): 0% floor means you never lose money. Market drops 50%? You get 0%. Complete downside protection.

Buffer (RILAs): You can lose money beyond the buffer. Market drops 50% with 10% buffer? You lose 40%.

The trade-off: RILAs typically offer higher upside potential (caps around 15-20%+) compared to FIAs (caps around 10-12%) because you're taking some downside risk.

Common Buffer Levels

10% buffer: Most common, balances protection with upside potential
15% buffer: More protection, slightly lower upside caps
20% buffer: Maximum protection available, lower upside caps
5% buffer: Less common, highest upside potential but more risk

You typically choose your buffer level when you buy the RILA—higher buffer means more safety but lower potential gains.

Who Should Consider Buffers?

Good fit if you:

Want more upside than FIAs offer
Can tolerate some losses (5-20% range)
Understand and accept that severe markets could hurt you
Have other safer assets and this is your "growth bucket"

Not a good fit if you:

Need 100% principal protection
Can't sleep if your account value drops at all
Don't understand the downside risk beyond the buffer

Real-World Performance

In the 2022 market downturn (S&P 500 down ~18%), a RILA with a 10% buffer would have protected the first 10%, meaning account holders only lost about 8%. Meanwhile, stock portfolios lost the full 18%.

But in the 2020 COVID crash (S&P down ~34% at the bottom), a 10% buffer meant taking a 24% loss. The buffer helped, but didn't eliminate pain.

The Bottom Line

Buffers are middle-ground protection. They're not as safe as FIA floors (0% loss guarantee), but they offer more upside potential. You're essentially saying: "I can handle moderate losses if it means more growth potential."

Make sure you understand what happens in a severe downturn. The buffer helps, but doesn't eliminate risk.