Pros and Cons of Qualified Longevity Annuity Contracts

Contributed by: Matt Trujillo, CFP® Matt Trujillo

A recent IRS ruling made it possible to defer 25% or $125,000 of your 401(k) and/or IRA assets into a qualified longevity annuity contracts or QLAC.  Our financial planning department here at The Center decided to explore these in greater detail to see what, if any, merits these products might have in clients’ overall financial plans.

QLAC Option 1

To start there are two main types of these QLACs. In the first, you give your money to an insurance company in exchange for substantial future payments (usually beginning at age 85). In return, the life insurance carrier gets to keep the full initial premium in the event that you pass away prior to benefits starting. This is an insurance product like auto and home-owners insurance in the sense that if you don’t use it, you lose it.  Due to this forfeiture of initial premium, this product has not been widely adopted.

QLAC Option 2

So, in order to make the product more marketable, insurance companies have recently come out with a second type of product that guarantees a return of your initial premium. However, this too has drawbacks because you are giving up any potential growth you might have had on the money prior to benefit payments commencing. Also, when benefits do finally commence, the payout is not quite as high as the first product because the insurance carrier is on the hook to return 100% of the initial premium.

Consider the Drawbacks

Essentially the drawbacks of QLACs can be summed up quite easily. If you purchase one and you die prior to benefits commencing, then you made a bad deal. However, if you purchase one and do live at least 5 years past the commencement of benefits, you rapidly recover the entire initial premium and start to draw more than you initially paid.  

Just like the name of the product suggests, these seem to only make sense as a hedge against living an above average life expectancy. If longevity risk is something that concerns you, we encourage you to speak with a professional to understand what methods can be taken to give your plan the greatest probability of success!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matt Trujillo and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss any tax matters with the appropriate professional. Guarantees are based on the claims paying ability of the issuing company.