Qualified Longevity Annuity Contracts (QLAC): What Retiring Clients Need to Know
- By Warren Yancey
- October 14, 2015
On July 1, 2014 the IRS and U.S. Department of Treasury approved a new special type of longevity annuity for use in qualified retirement plans such as traditional IRA’s, 401(k)’s, and 403(b)’s or as stand-alone individual plans. These new types of annuities are called QLAC’s or Qualified Longevity Annuity Contracts and for many prospective clients they can provide an easy-to-understand point of entry into the world of annuities.
WHAT ARE QLAC’S?###
QLAC are a new tax-status funded by Deferred Income Annuities (DIA’s). By design, QLAC’s enable qualified funds to further delay required minimum distributions (RMD’s) and can lessen tax burdens to secure a larger future income. They provide principal protection and can be deferred up to age 85, but offer death benefits to ensure beneficiaries will receive the funds in the event the owner cannot. The premium amount is indexed for inflation and an optional Cost of Living Adjustment (COLA) rider may be available on some designs, but there are tradeoffs to consider when adding. Currently, premium limits on these deferred annuities are $125k or 25% of all qualified accounts held by the individual (whichever is less), but joint QLAC’s are available and effectively provide a $250k limit per household.
The appeal of QLAC’s comes in large part due to their simplicity. They have no fees, clearly defined rules and regulations, and guaranteed fixed rates that compare favorably to those offered by CD’s. The more complicated and expensive annuity flavors, variable and indexed, are not approved as QLAC’s under law. This may discourage some agents from endorsing QLAC’s out of fear commissions will be too low, but remember, this is a gateway product to get clients comfortable with annuities and begin thinking about more complex products.
SHOULD I RECOMMEND FOR MY CLIENTS?###
This isn’t to say QLAC’s are for everyone. They have no cash value once issued, so lack the liquidity of other investment options. Their rigid structures and low upside potential may rule them out for clients looking for more income growth. But for conservative investors looking to keep their money safe and hedge longevity risk with a guaranteed stream of income later in life, QLAC’s are extremely attractive as a way to diversify their investment and retirement portfolios.
The Milner Group currently offers QLAC’s from these highly rated carriers: AIG, Americo, Lincoln, Pac Life, and Principal. However, given the relative newness of QLAC’s more and more carriers will be adding these to their product lines so be sure to check with us to see if your carrier of choice offers one.
Click the link below for more information and help deciding if a QLAC can be a useful tool in your client’s retirement strategy.