Adding QLACs to our toolkit

I went to a presentation yesterday from a NY Life agent about Qualified Longevity Annuity Contracts (QLACs). It’s a deferred annuity that moves up to $200,000 out of your IRA (where it’s subject to RMDs) into a cash stream in your old age. 

They’ve been around since 2014, but for the past few years they were a very uninspiring product that had a very limited use case. There were a bunch of changes made to them in the SECURE 2.0 Act, though. Now I’m pretty sold on getting them for some of the people I serve, including my husband. 

Here’s why you might want one:

  • If you’re concerned that you might outlive your money because of longevity, it acts as the inverse of life insurance. Instead of you paying a life insurance agent some premium each month and then they pay a lump if you die, you pay them a lump and they pay you a premium every month if you live. It neatly shifts the risk of living too long to an insurance company.
  • If you’re unclear about how much you can spend in your “go go” years, you can shift a pot of money to the “no go” (extreme elder) years and feel more comfortable that it’s safe to spend what’s left now.
  • If you don’t need the IRA money yet and don’t want to pay taxes on it, this cleverly reduces the amount of your RMD because it shifts $200K out ten years or so.
  • It’s a good alternative to a bond ladder, as it has an extra “mortality credit” premium added to the amount of income you’d get. Although there’s an upfront sales charge the agent gets (not me!), it’s got no carrying costs after that.
  • There’s such a thing as “pension envy,” where people in old age really envy the people who have pensions depositing into their bank account. It’s super helpful for any caregivers who are trying to pay your bills, too. Managing money actively gets harder and harder the older you get. I try to get people a clear-cut source of funds directly deposited into their bank accounts every month when they’re in the extreme old age period. This is a good way to get it.

Here’s why you might not want one:

  • It’s a specific type of deferred annuity with more restrictions on it. During the deferral period, you will not be able to touch the principal. We can set the deferral period to end at age 80 and then give it the option to defer up to an additional five years, though.
  • There are only two options for how to get the money back if you die early: one is to share the annuity over the life of your spouse, too. Most married people will pick this, but it reduces the ultimate payout as the odds of one out of two people living to 100 are much higher than the odds of any given person.
  • The other option is a refund of premium, meaning the contract price is refunded to your heirs (less any you’ve taken if you’ve already started taking distributions). Obviously, this reduces your monthly income if you choose this option. I do not encourage people to do this; just consider it a cost of insuring against longevity. Only put in $100K instead of $200K if you don’t want to risk your heirs losing that much. But I’d rather you think of this as buying yourself a pension with some of your retirement money.
  • If you do take the return of premium option, the heirs receive it as a lump sum of 100% taxable money. Ouch!

Here’s how I can help:

One of the main reasons to use a fee-only fiduciary financial planner who works under an annual retainer is that we can be agnostic about you using assets under management to buy products like this. We’re not charging based on your assets under our management, so we aren’t conflicted against giving this advice, but neither do we receive commissions for selling a product, so we are not conflicted in favor of giving this advice. We can look at your financial plan and model it with and without a QLAC and get a good recommendation that is specific to you.

Dealing with insurance agents is always tricky. The QLAC market is tiny and the people selling them are all people who also sell more lucrative deferred annuities. I’m hesitant to put the people I serve in front of sharks, and it’s hard to find people to work with. We’re doing the work in our office to find someone we can send our people to. (I’d been waiting for TIAA to start offering these, but they still haven’t.) I’m going to beta test this with my husband and then we’ll try it with our other people!