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A Longevity Annuity Means Never Outliving Your Money

Stan Haithcock
June 21, 2021
A Longevity Annuity Means Never Outliving Your Money

Update: As of January 1, 2022 the QLAC limit increased to $145,000.

Let us help you make sure you master all the details of your longevity annuity so you can decide if they will be an asset to your specific retirement plan.

How does longevity insurance work?

Longevity insurance solves longevity risk; you are solving for never outliving your money, which is a fear that a lot of people have. You're solving for that contractually. So, what you're doing is you're giving the money to the life insurance company that issues the annuity. Whatever annuity you choose like a Single Premium Immediate Annuity, a Deferred Income Annuity, a Qualified Longevity Annuity Contract, or an Income Rider attached to a deferred annuity, they all provide lifetime income streams. All four of those are transfer risk products that solve for longevity risk. They also have a guaranteed lifetime income stream that's primarily based on your life expectancy, or if it's joint, life expectancies when you take the payment. Interest rates play a secondary role.

In essence, you're getting your money back with interest, and if you draw the account down to zero, that's okay because the annuity company is still on the hook to pay. I have thousands of clients who have implemented this type of longevity risk insurance in their portfolios using annuities and their accounts at zero because they have outlived their life expectancy. That's the benefit proposition that only annuities can guarantee, is lifetime income. So they have a monopoly on it, just like Social Security, which is a lifetime income stream and an annuity structure.

Just like your pension, if you're so fortunate, it is a lifetime income stream that pays forever. That's what annuities do. For the last couple hundred years, most people use annuities to solve for longevity risk and to provide longevity insurance within their retirement planning.

What is a Qualifying Longevity Annuity Contract?

A QLAC is the newest version of an annuity that's been introduced in a long, long time. In 2014 the IRS and the Department of the Treasury came out with a QLAC. Qualified Longevity Annuity Contract or Qualifying Longevity Annuity Contract is a future pension plan that you can use inside of your traditional IRA and some 401k. In addition, some employer-sponsored plans are starting to offer these but primarily where people use them is in their traditional non-Roth IRAs to provide a lifetime income stream.

Qualified Longevity Annuity Contracts are fantastic. There are no moving parts to the periodic annual fees. The built-in commissions are meager, and you can add a spouse or partner for a joint lifetime income stream, which is fantastic. Plus, the amount of money you put in a Qualified Longevity Annuity Contract is not part of your overall RMD calculations (required minimum distribution calculations) when you turn 72.QLACs are pension products; you can start them as soon as age 72 and can wait as late as age 85. You don't have to wait till age 85, but at age 85, you have to start the income stream.

Currently, the 2020 rules for funding a QLAC are changing, but for 2020 it's the lesser of 25% of your total IRA assets or $135,000. So each husband, wife, spouse, or partner can have a QLAC and set the spouse up for a lifetime income stream, and we can run those quotes using our annuity calculators.

How much does longevity annuity insurance cost?

That's the benefit proposition that only annuities can guarantee, is lifetime income.

Well, let's talk about longevity insurance in general. Longevity insurance, or solving for longevity risk, ensures you don't outlive your money, making sure that the payments will last for your lifetime. So there are a couple of products in the annuity world that solve longevity risk. They will pay a lifetime income stream, and oh, by the way, annuities are the only product type on the planet in the financial world that can provide and will provide a lifetime income stream, regardless of how long you live.

The cost of a Longevity Annuity comes down to your life expectancy at the time you make the payment. The Annuity company will make a prediction of your life expectancy and set the prices from there. Life expectancy is the primary pricing mechanism, with interest rates playing a secondary role. But the bottom line is regardless of how long you live, the annuity company is on the hook to pay.

So how much does longevity annuity cost? It depends on your life expectancy. It depends on when you make the payments, but we can run those quotes for you and go over those numbers in detail.

Is a QLAC a good idea?

It depends. It's not for everybody. I mean, there's no one size fits all annuity product. Every annuity is a contract that life insurance companies issue them. QLACs are no different from that. It's only a good idea to transfer risk and have a future pension income stream using your IRA money. If you do not need income from your IRA, you probably don't need a QLAC. I like using QLACs to combat future inflation. The best strategy is to structure a QLAC so that your guaranteed income starts at a future date to combat possible inflation.

The real reason you should consider a QLAC is if you're married or have a spouse or partner and you would like to set them up for a lifetime income stream as well. So, in other words, if you have a joint life Qualified Longevity Annuity Contract with your spouse or partner, and you die, your Learjet hits the mountain; if your spouse is still alive, that income stream continues uninterrupted and unchanged for the rest of their life.

If you're looking for honest advice, book a call with me, and we can figure out what plan works best for your specific situation. Or, run your own quotes using our proprietary annuity calculators.

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