7 questions to ask before buying a QLAC
As more carriers enter the qualified longevity annuity contract, or QLAC, game, it’s important to know the right questions to ask so you can properly structure the policy to meet your desired goals.
1. Do I want the payout to be single-life or joint-life?
Lifetime income payments from annuities are primarily based on your life expectancy at the time you take the payment. In the annuity ivory tower, this return is referred to as mortality credits or mortality yield.
Even though a single person owns an IRA, you can choose to structure the lifetime income to pay for the lives of both you and your spouse. Common sense would tell you that the guaranteed payments for two lives will be less than one life, but many like the option of taking care of their spouse with a QLAC guaranteed income stream.
2. Should I add a return-of-premium guarantee?
A common fallacy about annuities is that the annuity company always keeps the money if you pass away early in the contract. That is only one of many ways to structure the payout, and it’s referred to as “life only.” Some QLACs allow you to choose life only, which does provide the highest guaranteed payout.
However, you can also add a return of premium, or ROP, guarantee to your QLAC contract as well. For example, if you pass away during the income-stream phase, your listed beneficiaries would receive any unused amount and the annuity company wouldn’t keep a penny.
3. Does a COLA rider make sense?
Cost of living adjustment (COLA) riders are attachments to a policy that will annually increase your income by the percentage you choose at the time of application. This feature might sound too good to be true, but annuity companies have the big buildings for a reason — they don’t give anything away.
If you add a COLA rider to your QLAC policy, the initial income payment will be lower than if you didn’t add the COLA. That doesn’t mean you should not consider a COLA, but you should ask your agent to show you both quotes (with and without) to compare the payout differential.
4. What are my total IRA assets?
QLACs allow you to use the lessor of 25% of your total IRA assets (non-Roth) or $130,000, whichever is less. For example, if you have $500,000 in total IRA assets, then you can place $130,000 in a QLAC.
The QLAC ruling does mention an increase in the premium limit in future years, but that amount will be minimal and happen every three to four years, in my opinion.
5. When do I want the lifetime income to start?
QLAC rules allow you to defer the income start date to as far out as age 85. You can start the payments any time before age 85, and you might choose to stagger income start dates at 75, 80, and 85 using multiple contracts.
6. How many QLAC carriers fit my parameters?
It’s important to know that QLAC issuers won’t always offer every benefit. For example, some might offer “Life Only” as a payout choice, and some may not. Even with the handful of companies currently offering QLACs, not every option is available with every carrier. Make your agent shop all the carriers that fit your specific contractual goals. Don’t allow them to only show you one QLAC company.
7. What will be my potential RMD tax savings?
One of the unique benefits of the QLAC product is that the premium amount isn’t part of your required minimum distribution (RMD) calculation. For example, a $500,000 IRA asset total would allow you to place $130,000 into a QLAC. When you calculate your RMDs using this scenario, the amount used would be $370,000 instead of $500,000.
Par for the annuity course, the QLAC misinformation and hype has already begun. That’s why I locked myself in a room and wrote my QLAC Owner’s Manual. It’s an easy to read translation of the July 1, 2014 ruling by the IRS and the Treasury Department, and fully addresses all things QLAC.
There is never an urgency to buy an annuity, and that includes the pro-customer QLAC product. Take your time, do you homework, and make sure to shop all QLAC carriers.
Originally published 3.12.15 by MarketWatch.com – http://www.marketwatch.com/story/7-questions-to-ask-before-buying-a-qlac-2015-03-10