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What Is a QLAC: Qualified Longevity Annuity Contract

Stan Haithcock
December 21, 2021
What Is a QLAC: Qualified Longevity Annuity Contract

Today's topic is what a QLAC, qualifying longevity annuity contract, is? A relatively new offering from the annuity industry. We're going to cover a lot today on qualifying longevity annuity contracts. I'm also going to call them QLAC. What is a QLAC? What do they solve for? What's the history of a QLAC? We are going to go over all of that. We're also going to talk about the limitations and the benefits of a qualifying longevity annuity contract and how to structure the quote, even where to get a quote. At the very end, I'm going to tell you where it fits in your portfolio or where it doesn't fit. Spoiler, you might not need one.  

What is a QLAC, a qualifying longevity annuity contract? An annuity solves for income later®, so income in the future. Now the cool part about a QLAC, qualified longevity annuity contracts, is that you can use them inside of your traditional IRA and some for one case. Still, most people are using them in their traditional IRA. Also, a QLAC allows you inside of your IRA, your own IRA to attach your spouse or partner as a joint lifetime income participant, meaning that when you pass away, the income stream continues uninterrupted and unchanged for their life.

Qualified longevity annuity contracts are, in essence, deferred income annuities. Same structure, it’s just different rules on where they can be used. Let's talk about the history of QLACs. When did they start? In 2014, our friends, and I did call them friends, at the IRS and Treasury developed this product that could be used in the sample when case and all traditional IRAs for future income.  

What are they trying to tell us as a society? Hey, you need to plan for income. Social security is not supposed to be the primary source of your pension income. So qualified longevity annuity contracts were put on the planet so that you can use IRA assets for future income. Qualified longevity annuity contracts should be, and I think I will be the number 1 type of annuity bought by people out there. Because most people have a lot of assets in their IRA, most people need future income.  

QLACs, qualified longevity annuity contracts solve for two primary things. Number 1 is future income. An income that you started at a future date inside of your traditional IRA and that income you can never outlive. The other good thing is attaching a spouse or partner as a joint lifetime annuitant. In other words, they're going to get a lifetime income stream as well, regardless of how long they live.  

Within a qualifying longevity annuity contract, the money you put in there is not used to calculate your requirements and distributions. It's also going to lower the taxes on your RMDs legally, your required minimum distributions are always a good thing to lower taxes legally. How much money can you put in a qualifying longevity annuity contract? Well, those rules are dictated by our friends at the IRS, and yes, they are our friends and the treasury. Currently, you can put in up to $130,000, and the rules are this, 25 percent of your total IRA assets or $130,000, whichever is less, and that goes for you or your spouse. Each of you could own a QLAC.

Let's talk about the benefits of a qualifying longevity annuity contract. Number 1, you can use it in a traditional IRA, and you can set it for lifetime income for you or you and your spouse. It also lowers your required minimum distributions because that dollar amount you use in a qualifying longevity annuity contract is not used when you calculate your requirement of distributions. That's always a good thing to lower taxes legally.

Moving on, you can also structure so that 100 percent of the money goes to your beneficiaries if you or your joint holder dies. In other words, the evil annuity doesn't keep a penny even though they're on the hook to pay you a lifetime income stream if you live forever; that’s a good thing. That's the transfer-risk nature of a qualifying longevity annuity contract. Also, the benefit of a qualifying longevity annuity contract is you can start the income string inside that IRA as soon as age 71, but you can also defer it as far out as 85.  

In other words, at age 85, that's when you have to start taking income with a QLAC. But you can take it as early as age 71 and the years in between. You can also customize the quotes so you can get a lifetime income stream on you or you and your spouse and make sure that 100 percent of any unused money goes through beneficiaries. Remember, all annuity income, regardless of type QLACs, are the same. It's a combination of return of principal and interest. Even though the annuity comes on the hook to pay you, we can structure 100 percent of any unused money to the beneficiaries.  

One more thing, benefit-wise, you could ladder the QLACs. In other words, if $130,000 is the limitation currently at the time of this taping, then you could take half of that amount and ladder with income starting at age 75 then the other half of the income starting at age 85. Once again, you can customize the quote.  

Let's talk about limitations. All annuities have limitations. Let's talk about it, and you got to know these to make a good and informed decision on your terms and time frame. Limitations with QLACs include the fact that it's a rigid contract. Once the income starts, it's going to continue. You can't just call me and say, "I do not want to do that anymore; send me the money." I think that IRS and the Treasury did that because they didn't want people to all of a sudden get all this income stream and then say, "You know what? I'm going to buy a boat." No, they said you couldn’t do that. You're going to get the income stream because they want you to provide an income stream on your own with your traditional IRA that complements social security.

Another limitation is there's no interest rate growth on the qualifying longevity annuity contract when you defer. Let's just say you purchase one at age 70, and you're deferring to age 85. Is there any interest rate growth between now and then? The answer is no, but that's not always a bad thing. I know that people out there love to truck interests. I don't know about that. What they do is the longer you allow the annuity income you hold onto the money, the more they will pay you.  

But some people consider that lack of growth or that unity in the market, whatever, is a limitation. But you should never compare a qualifying longevity annuity contract to an investment. Why? Because it's a contract, it's not an investment it's a contractual guarantee. I think the primary limitation at this point is just the amount of money that you can put in a qualifying longevity annuity contract. Remember the rules are 25 percent of your total IRA assets or $130,000, whichever is less.

Let's talk about structuring the QLAC, the qualified longevity annuity, where you're going to get a quote. The two most popular types are communal life only. I'll give you the scenario that I got coming in the day, and he goes, "What does joint-life only mean?" Joint life only means when your Learjet hits the mountain, the money goes poof, and the evil annuity company keeps it, but you don't have to do it that way. That's the highest payout because you're shouldering some of that risk.

The most popular way people structure qualifying longevity annuity contracts is with a cash refund or joint-life with a cash refund. What that means is the new incoming is on the hook to pay you for the rest of your life regardless of how long you live. It doesn’t matter if you lived 150 and hook to pay. But when both of you die in that Learjet crash, the money doesn’t go poof; the money goes back to your beneficiaries. Life with cash refund or communal life with a cash refund.  

Life with cash refund, communal life with cash refund is the way to structure. Let's talk about giving a QLAC quote. What are we going to do? We're going to quote all carriers because buying a QLAC or qualifying longevity annuity contract; it’s a commodity quote. It's like buying a plane ticket. The quotes change every 7-10 days. It spoils like a gallon of milk. So you need to quote all carriers.

That doesn't mean you have to buy; you just understand that if you wait for more than ten days, you're probably going to have to requote it. But some carriers finished high one month and the next month they don't. That's the reason you have to continually quote all of them because it's like on a plane ticket. You don't know which carrier plane company you're going to go on. You just type in where you want to go, get the best deal, and then choose the same principle for qualifying longevity annuity quotes.  

I wouldn't advise you to buy a QLAC to lower your requirement and distributions because there's no pound the table amount that you're going to get excited about, it is a legal way to lower your requirement of distributions. But if you are out there and you have a traditional IRA, and you're thinking about future income for yourself or your spouse, then that's where they fit.  

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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