Home / Annuity 101 / Types of Annuities Part 5: Longevity Annuities (Qualified Longevity Annuity Contracts, QLAC)

Types of Annuities Part 5: Longevity Annuities (Qualified Longevity Annuity Contracts, QLAC)

Screen Shot 2016-06-30 at 2.12.44 PMA longevity annuity, or QLAC, provides protection against outliving your money if you or your spouse have good longevity. Also known as an advanced life delayed annuity, this type of annuity requires you to wait until you reach age 80 or later, to begin receiving a payout. Once the payout begins, the annuity provides a guaranteed regular amount of income for the rest of your life.

These are usually used as a supplemental retirement investment. You typically would invest just a portion of your retirement nest egg in a longevity annuity – say, 10% to 25% – and leave the rest in your other retirement accounts.

As with any deferred annuity, your money in a longevity annuity grows until you start receiving payouts. The later you choose to begin your payments, the larger your payments will be.

If you die before you begin to receive payments, your heirs get nothing….

Longevity Annuity Optional Benefits

option-3In most cases, premiums deposited into longevity annuities are forfeited in exchange for future income. One of the concerns many retirees have with this annuity product is how their asset or income stream will pass to their named beneficiaries. To address this concern, many annuities offer an optional death benefit rider. This rider provides the option for a return of premium of the remaining income stream to named beneficiaries if the contract owner dies within a specified period of time.

Another optional rider offers inflation protection, increasing the guaranteed income payments by a fixed percentage to protect the retiree’s ongoing earning power.

Optional riders are available for an additional fee, which reduces the income payments received from premiums deposited.

Longevity annuities offer investors guaranteed income for life in addition to higher payouts than other contract types. Longevity annuities are strong options for those who are concerned that they may outlive their assets.

Recent Changes

401k-1Changes to government regulations made in July 2014, make it possible to get such an annuity through your employer-sponsored plan, such as a 401(k), or even in an individual retirement account. The most you can invest in a longevity annuity is 25% of your retirement account balance, or a maximum of $125,000.

That amount is not subject to the government’s required minimum distribution, or RMD, rules that call for payouts from retirement accounts to begin at age 70 1/2. In other words, the amount invested in the annuity will be ignored when you calculate your RMD. This is key because you typically start to collect the longevity annuity payments in your 80s.

In October 2014, the Treasury Department and the IRS further expanded the availability of income annuities through target-date funds in 401(k) plans. Target-date funds provide investments tailored for different age groups and are often the default option for participants who don’t choose their own investments. The new government guidance allows retirement plans to offer annuity contracts in the fixed-income portion of target-date funds, either as a default option or an investment alternative. This means that if you are nearing retirement and haven’t actively chosen to invest in longevity annuities, you might still benefit from them if your plan offers this option.


Summary

Overall the concept is good, but the negative is the funds are no longer liquid and you may be able to do better by just investing in a quality index annuity that has solid growth potential and take income later.  When you look at historical interest rates which are at extreme lows, today’s rates affect the payouts in the next 25 to 40 years, which raises another question is if now is the right time to invest in a Longevity Annuity.

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