Skip to Content

Buffer annuities: Balancing protection and growth

July 19, 2022 Article 4 min read
Patrick Serda
In an uncertain market environment, an increasing number of investors are looking for downside protection without losing the opportunity to gain when returns are positive. Are buffer annuities for you?
A lady sitting in a chair using a laptop computer.After two-plus years of market volatility — and facing the possibility of further volatility in an environment of rising interest rates — some investors are looking for financial vehicles that can provide downside protection without relinquishing all of the upside benefits. One investment that has dramatically increased in popularity is the registered index-linked annuity, also known as a buffer annuity.

The buffer annuity is a relatively new solution in the marketplace that allows investors to transfer some risk without sacrificing the possibility for growth potential. These annuities combine benefits and features found in traditional fixed index annuities and variable annuities. For more information about each type of annuity, read our earlier article outlining the key features of each.

The buffer annuity is a relatively new solution in the marketplace that allows investors to transfer some risk without sacrificing the possibility for growth potential.

How does a buffer annuity work?

Buffer annuities have three key factors that need to be considered:

  • Level of protection: The first item is the desired level of protection, referred to as a “buffer.” The buffer is the mechanism that provides your downside protection, typically covering losses up to a threshold of between 10 – 30%. This is the percentage of loss that the insurance carrier will absorb. For example, if you have a buffer of 10% and your investment is down 8%, you’ll lose nothing. However, if the investment is down 25%, the insurance company protects against the first 10% of the loss, and you’ll lose 15%. Conversely, the annuity is credited a positive return when markets are up.
  • Investment allocation: Next, you’ll determine how you want your investment allocated. Instead of investing directly in underlying subaccount options like traditional variable annuities, buffer annuity assets track the performance of a market index. The available indices typically include the S&P 500, Russell 2000, MSCI EAFE, and others. It’s important to note that since the assets aren’t directly invested in a particular index, dividends aren’t included in any interest credited to the contract, and it’s merely the “price return” that will factor into the crediting rate.
  • Investment duration: Buffer annuities are typically purchased in one, three, or six-year lengths called “segments.” The investment assets allocated to each segment will track the performance of the selected index over the specified period. At the end of the term length, interest may be credited, and the segment will mature. Afterwards, a new segment will begin. Generally, the longer the duration, the more safety it will provide.

The specific combination of the prior items will determine how much, if any, interest may be credited. Like a fixed index annuity, the insurance carrier will impose a cap rate for the segment selected — essentially a ceiling for how much return can be credited over the segment duration. For example, as shown in the image below, a segment allocated on the selected index with a 10% buffer could have a cap of 12%, while a segment with a 20% buffer could have a cap of 5%. This rate is set by the insurance carrier and is locked in for the specified segment duration. Generally, the longer the duration, and the smaller the buffer, the higher the cap will be.

Generally, the longer the duration, and the smaller the buffer, the higher the cap will be.

Graphic showcasing buffer zones for positive index returns and negative index returns.

Additional features

  • Tax: As with other types of annuities, the growth that takes place inside a buffer annuity is tax-deferred. This allows the contract value to compound over time. No tax is owed until withdrawals are taken, and any taxable withdrawals are treated as ordinary income.
  • Annuity surrender: Most buffer annuities come with a six-year surrender schedule. This means that a penalty is assessed on any withdrawals during the first six years. The penalty is usually higher at the beginning and decreases each year. Most contracts, however, allow for penalty-free withdrawals up to 10% each year.
  • Fees: As long as invested assets are allocated to the index segments there are no insurance costs associated with a buffer annuity. (This is similar to a traditional fixed index annuity.) As a registered product, it may provide the option for allocation toward variable subaccounts. In this case, any assets allocated to the variable subaccounts would have fees assessed. Buffer annuities also allow for add-on benefits such as guaranteed death benefit protection and guaranteed income, which may come with additional costs.


While a buffer annuity isn’t a one-size fits all solution, there are benefits that may be suitable in circumstances where an investor is seeking market-linked growth along with some protection of principal. It’s important to understand that the benefits come with some drawbacks such as limited growth due to caps and the potential for some loss. As with any investment, investors should consider personal financial objectives and risk tolerance prior to purchasing a buffer annuity.

For more information or to discuss your annuity investment options further, feel free to contact us.

Valmark Disclosure:

The material contained in the article is for informational purpose only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. Any guarantees of downside protection against losses are limited to the claims paying ability of the insurance company issuing the buffered annuity product. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This is being provided solely as an incidental service to our business as (insurance professionals, financial planner, investment advisor, securities broker.)

Securities are offered through Valmark Securities, Inc. member FINRA and SIPC. Plante Moran and Valmark Securities are unaffiliated.

Related Thinking

Elderly woman reviewing long term care insurance options on her laptop computer.
March 23, 2022

Understanding long-term care insurance: Are you planning ahead?

Article 5 min read
A woman sitting on the edge of her bed with a cat nearby.
February 9, 2022

Applying for life insurance? Get the best health rating possible

Article 2 min read
A middle aged person sitting at an outdoor table using their cell phone.
January 12, 2022

Leveraging the power of life insurance inside an irrevocable trust

Article 3 min read