What is a Qualified Longevity Annuity Contract (QLAC)?

Shawn Plummer

CEO, The Annuity Expert

What Is A QLAC?

A QLAC is a deferred income annuity that allows individuals to invest a portion of their retirement savings and receive guaranteed income for life, starting later. This tool is particularly beneficial for those who want to hedge against the risk of outliving their retirement savings – a concern shared by many as life expectancy continues to rise.

Example: Imagine you’re Jane, a 65-year-old retiree. You might take part of your retirement savings – say $50,000 – and purchase a QLAC. In this agreement, you’ve set the income start date to your 80th birthday. From that day onward, you’ll receive a steady, guaranteed income for the rest of your life, no matter how long you live. This income stream is an excellent safety net and ensures you’re financially covered, even in your later years.

Key Takeaways

  • QLACs and Tax Efficiency: QLACs allow retirees to defer a portion of their Required Minimum Distributions (RMDs), reducing the taxable income amount until up to age 85. This strategy is beneficial for individuals who do not need the full RMD for expenses and prefer to delay these distributions.
  • Longevity Protection: QLACs provide a cost-effective method of longevity protection, ensuring a consistent income stream later in life, which is particularly valuable given the uncertainty of life spans. These contracts help mitigate the risk of outliving one’s assets, providing a stable income late into retirement.
  • Comparison with Bonds: When compared to bond investments, QLACs can be more cost-effective in providing guaranteed future income, primarily due to the “mortality credits” that enhance payments for policyholders living past their life expectancy.
  • Enhanced Retirement Spending: The combination of tax efficiency and guaranteed lifetime income from QLACs supports a higher and more confident level of spending in retirement compared to traditional investment strategies.
  • Flexibility and Risk Management: Investing in QLACs can be a strategic component of a broader retirement plan, offering flexibility and a balance between risk and return. By providing a steady income in the latter part of retirement, QLACs help individuals avoid overly conservative spending early in retirement and the associated risk of depleting assets too quickly.
Qualified Longevity Annuity Contract

How does a QLAC work?

A QLAC provides a guaranteed income stream that begins at a specified age, typically at or after age 85—the individual purchases the QLAC with a lump sum or a series of payments. The insurance company that issues the QLAC guarantees a certain income level for the remainder of the individual’s life.

The income from a QLAC is usually paid out monthly or quarterly. It is often used to supplement other sources of retirement income, such as Social Security and pension payments.

QLACs are designed to help individuals manage the risk of outliving their savings by providing a guaranteed source of income that cannot be outlived. They can be combined with 401k and other defined contribution retirement plans and have certain tax advantages, including exempting required minimum distribution (RMD) rules. This means that individuals do not need to start taking distributions from their QLAC until they reach the age specified in the contract. They can also reduce the required minimum distribution from other retirement accounts.

Qlac Annuity

At what age should you buy a QLAC?

The age at which you purchase a QLAC can significantly impact its effectiveness and the amount of income you can generate. Most people purchase QLACs when they’re between 60 and 70 years old. This age range balances the need for a significant income later in life with the reality of waiting for that income to begin.

Meet Tom, who purchased his QLAC at the age of 65. By doing so, he can set his income start date at 85, providing a significant income stream when his other retirement savings might be running low.

Is a QLAC a good idea?

The short answer? It depends on your circumstances and retirement goals. A QLAC can be an excellent idea for those worried about outliving their retirement savings and desiring a steady income later in life.

Consider Emily, who had substantial retirement savings but worried about depleting them too early. So she decided to purchase a QLAC as an insurance policy against longevity risk. Now, she enjoys her retirement, knowing a reliable income awaits her in later years.

What Is A Qlac

Why consider a Qualified Longevity Annuity Contract?

There are several reasons why an individual might consider purchasing a Qualified Longevity Annuity Contract (QLAC). Some of these reasons include the following:

  • To manage the risk of outliving their savings: A QLAC can provide a guaranteed stream of income for the remainder of the individual’s life, which can help to ensure that they have sufficient income to meet their financial needs later in life.
  • To supplement other sources of retirement income: A QLAC can be used to supplement other sources of retirement income, such as Social Security and pension payments.
  • To take advantage of tax benefits: QLACs have certain tax advantages, including being exempt from required minimum distribution (RMD) rules. This means that individuals do not need to start taking distributions from their QLAC until they reach the age specified in the contract. They can also reduce the required minimum distribution from other retirement accounts.
  • To simplify retirement planning: A QLAC can be a valuable tool for individuals who want to simplify their retirement planning by setting aside a portion of their retirement savings to provide guaranteed income later in life.

Overall, a QLAC can be a good option for individuals who want to ensure that they have a stable source of income during retirement and are looking for ways to manage the risk of outliving their savings.

Limitations

There are a few limitations to consider when purchasing a Qualified Longevity Annuity Contract (QLAC):

  • Limited flexibility: Once an individual has purchased a QLAC, they are generally committed to receiving the guaranteed income for the remainder of their life and do not have the option to change the contract terms or receive a lump sum payment.
  • Early withdrawal restrictions: If an individual withdraws funds from a QLAC before the age specified in the contract, they may be subject to early withdrawal penalties.
  • Limited options for beneficiaries: In some cases, the individual’s beneficiaries may not have the option to receive the remaining funds in a QLAC as a lump sum payment after the individual’s death.
  • Potential for lost growth: Because funds in a QLAC are generally not invested in stocks or other growth-oriented investments, there is a potential for the individual to miss out on potential growth in their retirement savings.

Overall, it is essential for individuals to carefully consider these limitations before purchasing a QLAC and to consult with a financial professional to determine whether a QLAC is a suitable choice for their specific situation.

Qlac Pros And Cons

Qualified Longevity Annuity Contract Pros and Cons

Here are some of the pros and cons of a Qualified Longevity Annuity Contract (QLAC):

Pros:

  • Guaranteed income for life: A QLAC provides a guaranteed stream of income for the remainder of the individual’s life, which can help to ensure that they have sufficient income to meet their financial needs later in life.
  • Can be used to supplement other sources of retirement income: A QLAC can be used to supplement other sources of retirement income, such as Social Security and pension payments.
  • Tax advantages: QLACs have certain tax advantages, including being exempt from required minimum distribution (RMD) rules. This means that individuals do not need to start taking distributions from their QLAC until they reach the age specified in the contract. They can also reduce the required minimum distribution from other retirement accounts.

Cons:

  • Limited flexibility: Once an individual has purchased a QLAC, they are generally committed to receiving the guaranteed income for the remainder of their life and do not have the option to change the contract terms or receive a lump sum payment.
  • Early withdrawal restrictions: If an individual withdraws funds from a QLAC before the age specified in the contract, they may be subject to early withdrawal penalties.
  • Limited options for beneficiaries: In some cases, the individual’s beneficiaries may not have the option to receive the remaining funds in a QLAC as a lump sum payment after the individual’s death.
  • Potential for lost growth: Because funds in a QLAC are generally not invested in stocks or other growth-oriented investments, there is a potential for the individual to miss out on potential growth in their retirement savings.

Overall, it is essential for individuals to carefully consider these pros and cons before purchasing a QLAC and to consult with a financial professional to determine whether a QLAC is a suitable choice for their specific situation.

Payout options

The payout options for a Qualified Longevity Annuity Contract (QLAC) depend on the specific terms of the contract and may vary from one insurer to another. However, some standard payout options for QLACs include the following:

  • Single life annuity: Under this option, the individual will receive a guaranteed income stream for the remainder of their life.
  • Joint and survivor annuity: Under this option, the individual will receive a guaranteed income stream for the remainder of their life. A reduced income stream will continue to be paid to a surviving beneficiary after the individual’s death.
  • Period certain annuity: Under this option, the individual will receive a guaranteed income stream for a specified number of years, regardless of whether they are still alive.
  • Return of premium annuity: Under this option, the individual will receive a guaranteed income stream for the remainder of their life. Any remaining funds in the annuity will be paid to the individual’s beneficiaries after their death.

It is important to note that the specific payout options available for a QLAC may vary based on the contract terms and the insurer issuing the annuity. Therefore, it is always a good idea to carefully review the terms of a QLAC and to consult with a financial professional before making a purchase.

Related Article: What is a Qualified Annuity?

How Do Longevity Annuities Compare?

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Immediate
Annuity
QLAC
Principal ProtectionNoYesYesYesYes
Access To PrincipalYesYesYesNoNo
Control Over MoneyYesYesYesNoNo
Tax-Deferred GrowthYesYesYesNoNo
Guaranteed GrowthNoYesYesNoNo
Guaranteed IncomeYesYesYesYesYes
Inflation ProtectionYesYesNoYesYes
Death BenefitYesYesYesYes/NoYes/No
Long-Term Care HelpYesYesYesNoNo

What is a QLAC IRA?

A QLAC IRA is an individual retirement account where you hold your QLAC. Funds held in a traditional IRA or 401k can be used to purchase a QLAC, providing a steady, deferred income in retirement.

For example, Sarah purchased a QLAC using funds from her traditional IRA. As a result, she managed to secure a future income stream while preserving her current lifestyle.

New QLAC Rules and Providers

The new QLAC rules have raised the maximum investment limit, allowing individuals to invest either $135,000 or 25% of their retirement account balances, whichever is smaller. This rule change offers retirees a more significant opportunity to secure their later-life income.

For instance, with a hefty retirement savings balance, Robert could invest more into a QLAC, thereby safeguarding a higher guaranteed income in his advanced age.

As for the question, “Who sells QLAC annuities?” several leading insurance companies provide these contracts. It’s crucial, however, to shop around and compare offers, as contract terms can vary. The best QLAC annuity will be the one that aligns with your unique financial needs and goals.

Take Maria, who was looking to buy a QLAC. She researched different providers, compared their terms, and finally settled on a policy that offered her the best rate of return and maximum financial security.

Next Steps

A QLAC annuity can be a great way to supplement your retirement income and make sure you have money coming in later in life. Contact us today to learn more about QLAC annuities or get a quote. We would be happy to help you understand how a QLAC annuity could fit into your retirement savings plan.

Qualified Longevity Annuity Contract

QLAC Annuity Quotes

Get a QLAC annuity quote from a licensed financial professional. This service is free of charge.

Contact Us
First
Last

Frequently Asked Questions

What is a Qualified longevity annuity contract (QLAC)?

A QLAC or qualified longevity annuity contract is an income annuity purchased under an IRA or a qualifying employer-sponsored retirement plan. It can start payments later than age 73 but no later than age 85. The funds allocated to QLACs may be excluded from Required Minimum Distributions (RMD) calculations after age 73.

How does a QLAC work?

A Qualified Longevity Annuity Contract purchased today can provide income beginning on any future date consistent with the contract but no later than age 85. A QLAC must be a deferred income annuity (DIA), meaning payments begin more than a year after purchase. The deferral period is between your QLAC purchase and the date your income payments begin. Payments under many QLACs may be deferred for five, 10, 20, or more years.

Why would I buy a QLAC with my IRA?

A QLAC purchased today can provide income beginning on any future date consistent with the contract but no later than age 85. A Qualified Longevity Annuity Contract must be a deferred income annuity (DIA), meaning payments begin more than a year after purchase. The deferral period is between your QLAC purchase and the date your income payments begin. Payments under many QLACs may be deferred for five, 10, 20, or more years.

How does the length of the deferral period affect the cost of the QLAC?

The longer you wait to begin income payments, the higher your payments can be for the same amount. The difference in cost is based on life expectancy and the length of time between the date of purchase and the date payments begin. Remember that with a Qualified Longevity Annuity Contract, as with any deferred income annuity, your premium is permanently converted to a guaranteed income stream that can last for your lifetime.

Is there a minimum purchase age restriction?

No.

Is there a limit to how much money I can use to purchase an IRA QLAC?

Under the Secure 2.0 Act, a qualified longevity annuity contract now offers the opportunity to contribute up to $200,000 starting in 2023.

Are Roth IRAs or inherited IRAs eligible to be classified as a QLAC?

No.

If I die before my selected payment start date, will my heirs lose the premium I paid for the QLAC?

An owner can select from two pre-commencement death benefit options. The return-of-premium (ROP) option allows the premium to be paid to your beneficiary(ies) in the event you die before the income start date. This option increases the Qualified Longevity Annuity Contract’s cost and decreases the deferred income payment. The second option offers no death benefit but provides higher income payments. However, if you die before the income start date, no death benefit or income payments will ever be paid, and your QLAC will terminate.

What payment types can be selected with a QLAC?

The annuity payout options are limited to a single or joint life only and single or joint life with a cash refund.

Are annual payment increase options available?

Some QLAC payment options have a Cost of Living Adjustment (COLA) to help with inflation adjustment.

Can my QLAC provide for annuity payments to my spouse if I die first after income payments begin?

Some QLACs offer joint and survivor and joint and contingent payment options requiring the joint annuitant to be a spouse.

When must the joint annuitant start income payments if the owner dies before the income start date on a joint-life QLAC?

The spousal joint annuitant must start income no later than the original income start date.

Can a QLAC become a non-QLAC contract by changing the income start date to before the owner is 72?

A Qualified Longevity Annuity Contract that provides the option to change the income start date does not disqualify the contract from being a QLAC, even if the owner exercises the option and begins receiving income before 72.

Suppose the owner dies before income payments begin under the QLAC, and a death benefit is payable to a beneficiary. Is that death benefit eligible to be rolled over to another plan or traditional IRAs?

If the owner’s death occurs before the owner’s required beginning date, the proceeds should be eligible for rollover. However, if the owner’s death occurs after the RBD, the death benefit payment is treated as an RMD and is not eligible for rollover. Similarly, if the surviving spouse’s death is after the RBD for the surviving spouse, then the death benefit payment is treated as an RMD and not eligible for rollover.

Is commutation permitted with QLAC contracts?

No. There is no commutation benefit.

Can I access the funds inside the QLAC?

A Qualified Longevity Annuity Contract (QLAC) has no cash surrender value or commutation benefit.

What is a qlac ira?

A QLAC IRA (Qualified Longevity Annuity Contract IRA) is an individual retirement account (IRA) with a QLAC annuity contract. The QLAC annuity provides a guaranteed income stream starting at a specified age, typically after age 85. A QLAC IRA allows individuals to use a portion of their IRA savings to purchase a QLAC annuity contract, which can help to reduce the impact of inflation and market risk on retirement income.

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

Scroll to Top