For many years, insurance carriers have offered consumers guaranteed lifetime income from fixed, indexed and variable annuities. But the amount of income that is generated from these contracts cannot adequately cover the living expenses of many retirees in their later years. For this reason, another form of guaranteed income protection known as Qualified Longevity Annuity Contracts (QLACs) has appeared. This relatively new product can provide substantial income protection for its users in some cases, but consumers need to understand how this vehicle works in order to correctly position it within their retirement plan.
How They Work
QLACs can essentially be classified as a type of “term” annuity. Whereas term life insurance provides a much larger death benefit for a lower amount of money without any accumulation of cash value, longevity contracts provide pure income protection with no tangible contract value. Unlike traditional annuities that are sold as contracts and can grow in value, QLACs are typically funded by retirees who may be in their 60s and begin paying out a monthly benefit starting at age 85 or later. The primary advantage that they offer is that they will usually pay a much higher monthly benefit at that time than a traditional annuity. (For more, see: A Guide to Qualified Longevity Annuity Contracts.)
For example, a 60-year-old who puts $100,000 in an annuity might get $750 a month for a guaranteed straight life payout starting at age 65. But if he or she would put that same amount into a QLAC, then he might get $5,000 per month starting at age 85. But this contract will not pay out sooner than that, and the purchaser will receive nothing back if he or she dies before reaching the trigger age. A return-of-premium rider is usually available with these products for an additional cost. Buyers are allowed to put in up to 25% of their retirement savings or $125,000 (whichever amounts to less) into these vehicles. (For more, see: Longevity Annuity Tax Rules: What You Need to Know.)
A New Solution
The biggest advantage that QLACs offer consumers is the ability for them to plot a definite end point for their retirement income. Those who purchase this coverage can then reallocate the remainder of their assets so that they only have to last until the QLAC payout begins. Then, if they outlive the combined payout of the rest of their savings, the QLAC benefit will kick in and provide them with a monthly payout that can meet their expenses for the remainder of their lives. This type of vehicle may also be viewed as a form of long-term care coverage as it does not require medical underwriting but will pay out a substantial monthly sum for the duration of the purchaser’s later years which can be used to cover the high cost of managed care. (For more, see: Understanding Regulations on Qualified Longevity Annuity Contracts.)
Some experts have estimated that someone with $100,000 of retirement savings can devote $10,000-$15,000 to a QLAC and get the same amount of income starting at age 85 that a $60,000 investment in an immediate annuity would provide at the same age. And the payout can increase for those who wait longer to take it, with no market risk. For these reasons, many financial pundits feel that the QLAC market will mushroom exponentially in the next few years.
The Bottom Line
Qualified Longevity Annuity Contracts have just begun to make their impression on the financial marketplace. Consumers who are concerned with outliving their income can insure themselves against the risk of superannuation with these products and Congress recently allowed them to be used inside individual retirement accounts (IRAs) and other retirement plans. (For more, see: How Advisors Can Help Address Longevity Risk.)