Qualified Longevity Annuity Contracts (QLACs) Explained
What Is a Qualified Longevity Annuity Contract (QLAC)?
A qualified longevity annuity contract (QLAC) is a type of deferred immediate annuity, funded with an investment from a qualified retirement plan or an individual retirement account (IRA).
As long as the contract complies with regulations spelled out by the IRS, the funds are exempt from required minimum distribution rules until you begin your lifetime annuity payments.
Qualified Longevity Annuity Contracts (QLACs) were introduced in 2014 but adoption remains slow due to perceptions, low interest rates, and liquidity concerns.
In this guide, I will present the findings of an ongoing 7 year QLAC study being conducted by one of the largest independent annuity brokerage firms in the country, Ash Brokerage³.
QLACs continue to provide value in low rate environments and create more liquidity...
Qualified Longevity Annuity Contract History
At a July 1st, 2014 announcement, J. Mark Iwry, Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy Stated:
“All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings.”
He continued, “longevity annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”¹
The U.S. Department of Treasury and the IRS issued the final rules regarding Qualified Longevity Annuity Contracts.
2021 QLAC Limits and Taxes
A person is allowed to place $135,000 (as of 1/1/2021) or 25% of their retirement savings accounts into a QLAC.
Amounts placed in a QLAC do not count as the 12/31 previous year account value for RMD calculations. In fact, the income from a QLAC may be deferred to as long as 85 years and one month.
If you are taking “unwanted RMDs” the tax advantages alone suggest a QLAC may warrant consideration.
Too often though, the tax implications are the only consideration for placing a Qualified Longevity Annuity Contract in a portfolio when the real issue is improving the overall chances for success in retirement.
The amount is indexed for inflation and adjusted by increments of $5,000. Currently, there is legislation that would propose a $200,000 contribution limit with no 25% limitation – further indication of that Congress is looking for more American’s to take on more responsibility for their retirement success.
A Qualified Longevity Annuity Contract (QLAC) is the only retirement savings vehicle that allows you to defer your Required Minimum Distributions beyond the age of 72 (previously 70 1/2).
QLAC Case Study:
Process and Assumptions
First, a range of investment portfolios were created:
- $540,000 was placed in each of the traditional portfolios: conservative, moderate-conservative, moderate-aggressive and aggressive.
- Allocation ranged from 20% fixed income and 80% equities to 80% fixed income and 20% equities.
- The fixed portion was represented by core bonds and TIPS, and the equity portion was illustrated by the Standard & Poor’s 500 index.
- Assets were placed in their respective allocations at ages 55, 60, 65 and 70.
- Performance is projected using capital asset models through Horizon Actuarial Survey which is made up of 35 investment advisors and their assumptions of capital markets. (See footnote in QLAC study)
- 5,000 Monte Carlo simulations were run on each of the portfolios. Likelihood of success was determined the probability of having at least $1 in each of the portfolios at ages 90, 95 and 100.
Next, a comparison was made to each of the portfolios with the use of a QLAC placing the maximum amount allowable in the QLAC at each of the ages.
Although QLACs allow the income to be deferred to age 85, the study recommend electing income at age 80 to give a full range of 10 years for the client to change income dates – five years prior and five years after the initial income selection date.
QLAC Performance
The Probability of Success Before & After QLAC
- $540,000 invested in the retirement portfolio, beginning at ages 55, 60, 65 and 70
- In all scenarios, retirement income begins at age 70
- In QLAC scenarios, the $135,000 is purchased at the time of investment (55, 60, 65 or 70)
- Probability of success was calculated using the account having $1 remaining in the portfolio at the end of retirement (ages 90, 95 and 100)
- Distributions include portfolio distributions only. No Social Security Income benefits are included in the study
Results:
- In all 48 cells, the probability of success was improved
- The QLAC improved the probability of success by more than 10% in 26 of the 48 cells
- 28 times the probability was moved to over 85% using a QLAC
- At younger ages and more conservative portfolios, QLACs made a larger increase in the probability of success
In fact, it is more beneficial to place a QLAC earlier in life where longevity can be mitigated.
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QLAC Providers
- American General Life Insurance
- Integrity
- Lincoln Financial Group
- New York Life
- Principal Life
- Symetra
- United of Omaha
| Carrier | Product | Deposits | Issue Ages | QLAC Options |
|---|---|---|---|---|
| AIG (American General Life) A.M. Best A S&P A+ | American Pathway DIA | $20,000 min, $135k max Death Benefit prior to income start date: Life/Joint Life=ROP | 18-83 Age Nearest | - Life - Joint Life - Cash Refund - Start Date Adjustment feature - Commutation Withdrawal Benefit - COLA increase 1-5% |
| Integrity A.M. Best A- S&P A- | Income Source Select | $10,000 min, $135k max | 31-83 | - Life Only - Life with a Cash Refund - COLA increase 1-5% - Flex income start date feature |
| Lincoln National A.M. Best A+ S&P AA- | Deferred Income Solutions | $1,000 min, $135k max Life Only: None All other opts: ROP | 18-80 Age Nearest | - Life with a Cash Refund - Accelerated Payment Feature - Cost of Living increase 1-4% - Flex income start date feature - Flexible premium version avail |
| New York Life A.M. Best A++ S&P AA+ | Guaranteed Future Income | $5,000 min, $135k Life Only: None | 31-80 QLAC Actual Age | - Life - Joint and Survivor - Joint Life - COLA increase 1%-3% compound - Flex income start date feature |
| Principal Life A.M. Best A+ S&P A+ | Deferred Income Annuity | $10,000 min, 135k max Death Benefit prior to income start date is ROP | Life Only 0-82 Actual Age | - Life - Joint and Survivor - Life and Joint Life - Flex income start date feature |
| Symetra A.M. Best A S&P A | Freedom Income Annuity | $10,000 min | 0-80 Age Nearest | - Life - Life with a Period Certain - Period Certain Only - Life and Joint Life - Joint and Survivor - COLA increase .10%-6.5% - Commutation to Beneficiary Option |
| United of Omaha A.M. Best A+ S&P A+ | Deferred Income Protector | $5,000 min $135k max Death Benefit Life Only: None All other opts: ROP | 40-75 Age Nearest Flex Prem min $2k | - Life and Joint Life - Flex Income Start Date |
Frequently Asked Questions
To use plain English, a Qualified longevity annuity contract is a pension you can buy for yourself using your tax-deferred retirement savings. Because of its special designation, QLAC income payments can start later than 72. This reduces your RMDs and associated taxes during that period of time.
Single Premium Immediate Annuity (SPIA) – income begins within 12 months of purchase.
Deferred Immediate Annuity (DIA) – income begins more than 12 months after date of purchase.
Qualified Longevity Annuity Contract (QLAC) – special type of income annuity that takes advantages of IRS code allowing you to defer taking RMDs on tax deferred savings up to age 85. Required minimum distributions begin at age 72 for all other qualified retirement savings accounts.
Visit our comprehensive Beginners Guide to Income Annuities page if you’d like a more in-depth understanding of Income Annuities.
Licensed Agents can sell QLACs as long as they are contracted with an insurance company who issues them.
Below are a list of Insurers that issue QLACs and are rated A or better with AM Best.
- AIG (A) – American Pathway Deferred Income Annuity
- Guardian (A++) – The Guardian SecureFuture Income Annuity
- Lincoln Financial (A+) – Deferred Income Solutions
- MassMutual (A++) – MassMutual RetireEase Choice
- Mutual of Omaha (A+) – Deferred Income Protector
- New York Life (A++) – Guaranteed Future Income Annuity II
- Pacific Life (A+) – Pacific Secure Income
- Principal (A+) – Principal Deferred Income Annuity
In This QLAC Guide
Sources:
- Federal Registrar, Vol 79, No. 127/ Wednesday, July 2, 2014/ Rules and Regulations, pp. 37633 et seq.
- Instructions for form 1098-Q. (Rev. December 2019) Qualifying Longevity Annuity Contract Information
- Ash Brokerage
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