Index-linked variable annuities are tax-deferred investment vehicles designed to protect against loss of principal. They offer upside potential up to a cap, with some measure of protection against market declines. Tax-deferred growth potential is based on the performance of linked-index options like the Standard & Poor’s 500 Index and is credited to the account based on a ‘cap’ rate defined in the contract.
Some ILVAs may offer a return-of-premium death benefit, and often include a combination of buffer and floor options which afford Advisors the flexibility and control to tailor a solution to a client’s particular risk tolerance. The buffer protects against losses within the buffer, but not beyond, and the floor acts as a stop-loss when index losses occur beyond the floor.
Cap rates, floors and buffers are correlated. Opting for a lower floor may limit potential upside. For instance, choosing a 0% floor (guaranteeing no losses at all) might allow for a cap rate of 3.85% in a particular linked index. While choosing a -10% floor (allowing for losses from 0 to -10%) might extend that cap in the linked index to 10.75%.