QLACs Explained - Pros, Cons, and benefits of Qualified Longevity Annuity Contracts

Qualified Longevity Annity Contract
These are relatively new, and a pretty niche part of the annuity marketplace. Qualified longevity annuity contracts, or QLACs. These were just created about 10 years ago, and recently had a big change from SECURE ACT 2.0 a couple years ago that made them even easier to use in a plan.
These are a type of deferred income annuity, where you make a large one-time payment now with money from your IRA, and in exchange you get monthly income that begins at a later date.
What makes these unique though is that the payments can be delayed until age 85, and you do not need to take RMDs, or required minimum distribution amounts on the money in a QLAC.
These annuities have a maximum value of $200,000 per person.
And I mentioned they were a small piece of the insurance landscape, here’s the figure at the bottom - they make up less than 0.1% of all annuity sales. So why are we taking our time to discuss these?
It just so happens that these are one of the best ways to protect a retirement plan against the risk of longevity, or outliving your assets.
$200,000 QLAC quote example
To start to show why, let’s look at an example with a 65-year old male today, who wants to purchase a $200,000 QLAC and have the payments begin in 20 years, at age 85.
This person would pay $200,000 today. And beginning at age 85 they would get a payment of just over $10,000 per month, or $120,000 per year. This payout comes with no guarantees. So if you die at age 85, your heirs get nothing.
QLAC Pros and Cons
What are the pros and cons of these types of annuities?
Again, these are insurance contracts, and they are providing you with a known return. There is no uncertainty about what the stock or bond market has to do over a period to get a certain amount of income.
And, the pro that is most important- There is almost no better way to protect against longevity and outliving your assets than a QLAC. We’re going to look at some specific numbers in a second, but if you somehow knew you were going to live to be 100, the math behind QLACs make them incredibly tough to beat.
Now there are some potential drawbacks to be very clear.
These are irrevocable contracts. Once you send over that $200,000, or whatever amount you choose, there is no getting it back until you live long enough to get your payments started.
That means that if you pass away earlier, these investments will end up producing a very poor return.
There’s also inflation risk with these, as there is with any fixed income.
Of course, a guarantee by a highly rated insurance company is a good thing, but these are not risk free. You are still putting faith in an insurance company to make the payments.
When to Consider a QLAC
And so right away you see that if you want to protect against longevity, that is exactly what QLACs are great for.
And the 3rd bullet point here is another benefit worth mentioning. It is very common to retire as 65 and feeling nervous to spend money. It is hard to comfortably spend early on when you don’t know how long you need to preserve your assets for, right? Do we need this nest egg to last 20 years or 40?
QLACs can give you confidence to spend early on, because you know that you already secured your income for later in life.
And now our planning window has shrunk. We set aside money into the QLAC to create an amount of fixed income you want later in life, and now it is much easier to say, ok this amount that’s left I get to spend until the QLAC kicks in.
QLAC vs Hybrid Long term care insurance
One last example that I just want to introduce here is how a QLAC can compare to the most popular form of long term care insurance, which is called hybrid long term care insurance.
With a hybrid long term care policy, you pay a big upfront payment, to secure income in the case that you need long term care.
These policies are complex, so I’m going to try and just summarize the basics of this sample policy we saw just a month ago for a 65-year old male, so it fit in nicely with the examples we have been using here.
This policy cost $153,000, and would have a payment of $10,875 per month at age 85. Again, it would only pay if you need long term care. But a payment pretty close to what we were looking at with a $200,000 QLAC.
The policy, as do all long term care policies sold today, also has a maximum benefit amount, in this case 4 years.
QLAC vs LTCi
Now why I think it is worth considering a QLAC instead of hybrid LTC in some instances is that when you look at the demographics for who needs long term care, it is primarily those over age 85, the same time QLACs can kick in for maximum benefit.
And also, the big concern everyone has with long term care is not needing it for 1 or 2 years, but for these dementia type cases where you might need 5, 8, or more years of high level care. This makes up about a third of people in LTC today.

[@Mr._Rick]

With Secure 2.0 if my RMD age is 75 does that mean I can’t start income from QLAC until age 76?

[@ArnoldMoteWealthManagement]

Thanks for watching and for the question. Have you already purchased a QLAC? If so, the original terms of the contract will remain. If you are considering a new QLAC purchase, you can elect any age up to age 85. Does that help answer your question?