QLAC Qualified Longevity Annuity Contracts

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Stan: Hi, I’m Stan The Annuity Man with

Gary: Gary from CANNEX.

Stan: Gary, today we’re talking about the newest annuity-the QLAC, or Qualified Longevity Annuity Contracts. What’s the LA stand for?

Gary: Not Los Angeles; Longevity Annuity.

Stan: This is a type of Deferred Income Annuity, which is also called a Longevity Annuity. I have just a little bit of history on this for the people.In 2014 our friends at the IRS and the Department of Labor said, “Hey, we want to help.” Isn’t that interesting? And they designed this annuity product. In essence it was designed for the young people with 401Ks to plan for future income needs, instead of just relying on social security. The good news about the QLAC product is that people with Traditional IRAs (non-Roth IRAs) can also take advantage of this. In essence it’s an Income Later product. It comes from the SPIA which then ushered in the DIA- the Deferred Income Annuity. Now an offshoot of the Deferred Income Annuity exists, and it’s called a QLAC. Tell us a little bit more about a QLAC, where it fits into a portfolio, and the rules in place for it.

Gary: Sure. If you want to set up Income Later payments, you can use non-IRA money to extend that first payment date all the way into your 80s if you like.

Stan: Right, and non-IRA money can’t be used to purchase a QLAC.

Gary: You can expect with an IRA account the government starts taxing you at 70-1/2.

Stan: I call that tapping you on the shoulder and going, “Oh by the way, we’d like our taxes now.” That’s the age that Required Minimum Distribution payments must start.

Gary: Right.

Stan: The QLAC is an asterisk to that rule. They are saying, “We’re giving you a little wiggle room there.” What is that wiggle room?

Gary: I can now defer my Traditional IRA money into my 80s to get the benefits of this contract. Essentially the IRS is giving people a pass.

Stan: The benefits are:

  • You can place $125,000 or 25% of your total Traditional IRA, whichever amount is less. Roth IRAs aren’t included. You’ve got a $500,000 IRA, you can put $125,000 into a QLAC.
  • You can defer as far out as age 85. You don’t have to go to age 85, but you can. You can go to 80 or 77 or 72, whatever you need to do.
  • When you take your RMD calculations, they are based on an amount less what’s held in the QLAC. Instead of $500,000, Gary, the calculation is going to be on $375,000.

This means you lower your RMD taxes.

When that QLAC income payment starts, that income stream is going to satisfy the RMD for that specific amount of money. This a legal way to lower your Required Minimum Distributions.

Is this the same payment structure as a DIA and SPIA?

Gary: Yes it is. It’s off the same product [inaudible 00:02:40]. You’re transferring the risk of outliving your money to the annuity carrier again. You’re getting your principal and interest, and your mortality credit back. The mortality credit, as we call it the last man standing credit, is basically the benefit credit you get if you outlive your expected life expectancy.

Stan: Okay.

Gary: The reason why we’re talking about this product is because we’re looking at the particular tax impact, or the tax relief, that the government’s providing you to deploy this type of contract within your Traditional IRA.

Stan: I think it’s important people understand what I like about QLACs. You can add your spouse as a joint payout person. You can literally create a joint pension with your spouse-using your personal IRA, even though you own the IRA. I think that’s fantastic! I know my wife likes that because when my Learjet hits the mountain, she knows that income is going to continue uninterrupted and unchanged. That’s what you can do with a QLAC.

So where does it fit in a portfolio? Let’s go back over where it fits, because it’s a narrow lane with a deferred income annuity, vs. a wide lane when using a single premium annuity. When using a QLAC, we’ve got a narrow lane. Define that lane?

Gary: We’re in the narrow lane because you can only use your Traditional IRA money. If you have a majority of your savings is in your 401K or a Traditional IRA, you can convert this into a deferred pension using a QLAC.

Stan: There are a lot of people out there saying, “You know what? If I thought I didn’t have to take RMDs, I wouldn’t from my IRA.”

This is also a way to combat inflation. What do I mean by that? I mean that you can plan to have income starting at a future date. You don’t know what the inflation levels will be, but you’re going to have more income starting at that future date. I really believe that’s how to use annuities for inflation.

What are some of the limitations of this product? Obviously all annuities are contracts, so they all have benefits and limitations. What are the limitations here with QLACs?

Gary: The government is giving you this opportunity, but you can only put $125,000 into the contract at the most.

Stan: That is a limitation. A lot of people say that’s not enough premium, but it is what it is.

Gary: Totally. Like government income products there are some limitations. A QLAC may not be real flexible. If you want liquidity, there are some rules and provisions in the contract, so you have to look for them. These annuity products may not be as flexible if you find you want to change your mind.

Stan: There is not any market growth, and no interest rate growth.

Gary: Right.

Stan: It is what it is. I’ve got a theory that the government didn’t want to make it very liquid, because they don’t want people to change their minds. They want people to plan for a future pension plan. They didn’t want people to sit and say, “You know what, I don’t want a pension plan any more, I want a boat.” No, you don’t need a boat. You need a future pension plan. That’s why I think why they made it a narrow lane. A QLAC is not irrevocable, but it is hard to get out of.

Gary: Right, and that’s a great point. Whether it’s a QLAC, or another Deferred Income Annuity type, or an Immediate Income Annuity, these are discipline products, if you will. You have to make the commitment to hold on to it to get the benefit that you’re hoping to receive.

Stan: You also have to make a pragmatic choice about allocation and proportion. You don’t want to go all in with all your money. You’ve got to make sure that you have some money liquid, etc. We’re also going to see the QLAC premium amount rules increase over time, but it’s not going to be huge. You can currently place a maximum of $125,000 in a QLAC. If your wife has a Traditional IRA, she can also do a QLAC. If you have a Traditional IRA, you can do a QLAC. A QLAC can be structured Joint Life or Life Only. We see the same misconceptions as we see with other Deferred Income Annuities, since this is a Deferred Income Annuity you can use in an IRA. What are other misconceptions?

Gary: There is a misconception that it’s irrevocable. You have some flexibility around making some changes, if you are not cashing out the contract. If you want to change your start date around that payment, you usually have one shot to do that. Say if your plans change as to when you’re going to retire.

Stan: There is a common question regarding timing the purchase of an annuity to interest rates. Everyone wants to be an interest rate guru, but nobody on the planet is. QLACs, Deferred Income Annuities (DIAs), and Single Premium Immediate Annuities (SPIAs) are the three annuity types that are solving for pension needs. Whether it’s Income Now or Income Later payments that are needed, the primary pricing mechanism is life expectancy, not rates.

Gary: Right.

Stan: Consumers are making a bet saying, “Hey I think I’m going to live longer than the carrier thinks I’m going to live. If I do, the annuity company is on the hook to pay me.”

Gary: Right.

Stan: In essence a QLAC is a future pension that you can use in your Traditional IRA. My clients love adding their spouse onto the policy. Whether they like them or not, Gary, they add the spouse for Joint Life future income. I think it is a big deal, because everyone likes income coming in.

Let’s look at a couple QLAC quotes on the Cannex platform. What have you got?

Gary: Let’s use an example consumer: Robert, a 65-year-old in Texas. In this case, let’s look at a Single Life contract for Robert. Let’s say he’s looking for a deferred income payment using his Traditional IRA money, or better yet let’s say he rolled over his 401k money. In our example he takes his $125,000 from his 401K at age 65 to put into one of these QLAC contracts, and he’s going to defer that first payment ten years.

Stan: If he had a million dollars in his IRA, it’s still maximum of $125,000 that could be placed into the QLAC. Alternatively iff he had $100,000 in his Traditional IRA, he’d only be allowed to put $25,000 into a QLAC, because it’s 25% allowed maximum. Maximum allowed placed into a QLAC is 25% of total Traditional IRA asset, or $125,000 whichever is less. (Each spouse can hold their own QLAC in separate IRAs)

Gary: Right. If he were to put $125,000 into a QLAC at age 65, deferring for 10 years, he would get 1300 bucks a month at age 75. (this is reflected in the chart shown on the Cannex platform)

Stan: He’ll receive $1300 monthly for the rest of his life.

Gary: This QLAC quote also includes a Cash Refund too.

Stan: So if his Learjet hits the mountain before all his premium is paid out, what happens?

Gary: His beneficiaries get the rest of the cash.

Stan: The wife goes and calls the insurance company, and they send her the check. What happens when you add the spouse onto a QLAC policy?

Gary: When you add a spouse onto a QLAC policy, it would certainly decrease the payment. Before we add the spouse, let’s push it out another 20 years. Say he wants to defer that long.

Stan: He lets the money cook.

Gary: He defers all the way out to the maximum age the government allows – 85 years old.

Stan: Got it.

Gary: Let’s take a look at that. Deferring 20 years out instead of 10 changes the payment level from $1300 a month to $3600 a month.

Stan: Wow!

Gary: That’s almost tripling the payment.

Stan: When people say, “You know what? Stan or Gary, the money’s not growing. I’m not seeing any growth.” Hello… That seems to be growth to me. Right?

Gary: Right. You could look at this as inflation protection as well at a later age.

Stan: There you go.

Gary: Let’s get back to your question around setting up a joint policy.

Stan: So he likes his wife, or tolerates her, and wants to put her on the pension plan within his IRA.

Gary: At age 85, deferring 20 years and run as Single Life, the monthly payout was 3600 bucks. If we add a spouse to the contract that payment goes down to 2300 bucks guaranteed to be paid for both lives. Still, 2300 bucks is a whole lot more than 1300 bucks.

Stan: So when he dies, she goes to the funeral, does a fake cry, and then heads to the bank. Does she continue to receive the same payment?

Gary: Yes. Same payment.

Stan: Beautiful. See that’s called marital bliss in a QLAC form.

Gary: Right.

Stan: That’s beautiful. Gary let’s wrap up QLACs. Qualified Longevity Annuity Contracts haven’t been around that long. They were first introduced by our friends at the IRS in 2014. Notice I said they are friends. Our friends at the IRS and the Department of Treasury decided to help people use their qualified money, a Traditional IRA not a-Roth IRA, to plan for future income. Hey what I like about it is:

It legally reduces your RMDs, your Required Minimum Distributions. It also allows you to start income at a future date, as far out as age 85. You can add your spouse, whether you like them or not. The QLAC is designed to provide income. Income is good. Maximum of $125,000, or 25% of your Traditional IRA.

I think this product, Gary, has the potential to be the number one selling annuity type on the planet. People say, “Stan, you’re crazy.” They might be right, but everybody who has a Traditional IRA should be getting a CANNEX quote for a QLAC. If you don’t, you’re missing the boat, because it’s a pension product. Everybody needs income.

Gary, what do you want people to know about QLACs?

Gary: Especially in the situation where most savings are wrapped up in a 401K or a Traditional IRA, this product gives you the ability to defer past that required RMD start date of age 70.5. If Income Later is your need, you can let it cook at the insurance company, and wait to turn payments on way past that Required Minimum Distribution date. This could be the right product for you.

Stan: That’s QLAC poetry. I’m Stan the Annuity Man.

Gary: I’m Gary from CANNEX and we’ll catch you next time.