What Is a Qualified Longevity Annuity Contract (QLAC)?

QLAC (A qualified longevity annuity contract) annuities are a tax-deferred annuity that is funded through qualified retirement accounts such as a 401(k) or through an IRA. This type of annuity provides the annuitant with guaranteed income for the rest of their life once it starts paying out.

Sometimes, financial products are created in direct response to the economic environment. This is the case for Qualified Longevity Annuity Contracts, or QLACs.

Don’t let the name scare you. At its core, this insurance product is actually quite simple and fulfills a specific purpose in your retirement plan. Namely, a QLAC guarantees an income stream later in life. This future income can help you cover expenses like food, medicine, clothing, and the occasional vacation.

A QLAC is also known as a deferred income annuity. This alternate name makes sense because, essentially, you give the insurance company a lump sum, and they provide lifetime income payments to you at a later date.

Why Were Qualified Longevity Annuity Contracts Created?

Life expectancies are increasing, retirements are lasting longer, pensions are more and more rare, and there is a lot of uncertainty about the future of Social Security. This environment creates the need for retirees to create their own source of guaranteed income. QLACS can step in and fill that need.

In 2014, the U.S. Treasury enabled the purchase of longevity annuity contracts inside of 401(k) and traditional IRA accounts. This lets consumers use what is usually their largest retirement savings vehicles to make a QLAC purchase. Insurers started selling QLACs in about 2015, and now the market is maturing with more than 10 highly rated insurers offering the product.

How QLACs Work

As we mentioned earlier, a QLAC is a type of deferred income annuity. At its most basic, you use qualified assets to purchase a QLAC. Qualified money is money that you’ve yet to pay income taxes on (tax-deferred funds). Qualified retirement accounts include 401(k)s, pensions, and IRA accounts.

Once you purchase your QLAC, you wait and let it accumulate interest. Then, in the future, the QLAC distributes your annuity payments in the form of monthly income payments. You select your income start date as part of the annuity contract.

In this way, QLACs sound like other deferred income annuities, but the difference is this: QLACs are the only way you can purchase an annuity with tax-deferred money that pays out at a future date.

QLACs are different from traditional immediate annuities because you don’t receive payments for at least 2 years.

The benefit to this strategy is that your future payments significantly increase the longer you delay them. QLACs allow annuitants to enjoy life now with the money you have saved, and they provide you with the peace of mind that there are payments coming in the future.

Making QLACs a part of your personal finance plan allows you to continue living comfortably, even when you start slowing down a bit!

Qualified Longevity Annuity Contract Rules

There are required minimum distribution (RMD) guidelines that force people older than 72 (as of July 2021), to withdraw a certain amount of money from their tax-deferred retirement accounts each year.

In 2014, The U.S. Treasury ruled that certain deferred annuity products are exempted from the standard RMD rules. Qualified longevity annuity contracts are one of the exempted products.

When you buy a QLAC, the government allows you to shield that money from your required minimum distribution calculation. That means lower required minimum distributions for you while you defer your QLAC income, which could be as long as 15 years.

Here are some of the QLAC annuity requirements

Fixed Payouts

A QLAC only provides static monthly payments. It is like a fixed annuity in this way. If you want a product that adjusts payouts based on an index or stock market returns, a QLAC is not for you.

Premium (Deposit) Limits

The IRS defines the maximum amount of money you can put into a QLAC. If you have less than $520,000 in your qualified retirement plan, you can use up to 25% of those assets to buy a QLAC.

This is based on your account balance at the end of the previous year. If you have $520,000 or more, the maximum QLAC purchase amount is a flat amount of $130,000.

Deferral Choices

You can defer payments only until your 85th birthday. The longer the deferral period, the larger your payments will be.

QLAC Annuity Positives

Qualified longevity annuity contracts have a lot of positives. Here are some of the biggest reasons to consider a QLAC when retirement planning:

• A guaranteed future income stream that you cannot outlive
• Ability to defer RMDs past age 72
• Ability to add your spouse as a recipient of the guaranteed payments when you die (joint life income)

QLAC Annuity Negatives

On the other hand, there are some negatives to QLACs. Qualified longevity annuity contracts are not for everyone. Here are some questions to ask before purchasing one:

Is it necessary? Ask yourself, “Do I need a QLAC?” If you have enough guaranteed money coming to you (through pensions, social security, etc.), then you may not need a QLAC.

Do I need the money now? Loss of control is something to consider. Once you place your money in a QLAC, it cannot be retrieved. You can only get it back via future payments or a death benefit.

What about inflation? Typically, the cost of living increases each year. Unless you purchase an inflation rider, your payments may not be worth as much as you expect.

Who Should Consider a Qualified Longevity Annuity Contract?

A QLAC is a good product for you if you think that other guaranteed retirement income sources—such as Social Security and pensions—won’t cover regular expenses as you age.

The product is also attractive if you wish to defer your required minimum distributions. Other factors that might drive you toward QLACs:

• You're not too far into retirement
• Your health is average or above average (you’re receiving payouts later, so you have to be around to receive the QLAC income!)
• You have a decent nest egg (more than $250,000) and can afford to use some of that money to secure future payments

If your assets top $5 million, the dividends and interest you receive should be able to generate sufficient retirement income, so you likely won’t need a QLAC.

Researching and Buying a QLAC

Before you buy, you’ll want to compare quotes and product features.

Look for a life insurance company that has been in the QLAC market for at least 5 years and has a history of financial strength and an AM Best rating of B++ or better. If you have any questions about what you're purchasing, speak with a financial advisor.

When you use some of your funds to buy a QLAC, be sure that you have sufficient liquidity for the short term.

Remember that you can’t withdraw money from a QLAC; you have to wait to receive the account value back in annuity payments. If you purchase a QLAC with only a small portion of your overall retirement money (typically 5% to 15%), this is usually not an issue.

And if you're looking for a deferred fixed annuity, look no further than Canvas Annuity. At Canvas, we have some of the best interest rates around, and you can buy any of our annuity products directly online. If you have any questions about the types of annuities we offer, talk to one of our non-commissioned agents. They can help you figure out which annuity product may be right for you.