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  • Posted April 30, 2019

Qualified Longevity Annuity Contracts

Be Aware of the Their Uses and Pitfalls

Let’s face it, much of the complexities in modern-day retirement stem for a single factor; people living longer.  Pensions and Social Security were originally designed to pay the manual laborer for a period of five to ten years as they completed their lives, rather than paying an individual for more than 30 years as they come closer to their centennial.

Qualified Longevity Annuity Contracts – The Upside

As technology, medical care, and quality of life have increased Qualified Longevity Annuity Contracts (QLAC’s for short) have become more prevalent in personal financial planning.  When used correctly, they can provide guaranteed lifetime income for later life, but like anything else, they require proper due diligence prior to facilitating them in your plan.

The QLAC is a deferred income annuity that guarantees that funds in a qualified retirement plan, such as a 401(k), 403(b) or IRA, can be turned into a lifetime income without violating required minimum distribution rules for those turning age 70½.

QLAC’s have important qualifications and limits to be aware of.  You are allowed to move $130,000 (It can increase. These are also flexible premium, so if the limit increases in the future you can add more) as a maximum premium from pre-tax investments.  As a pure insurance vehicle issued by a number of insurance companies, they provide guaranteed payments for a single life or joint spouses and are completely shielded from market loss.  One popular feature is that they also defer required minimum distributions on the amount funded until age 85.  This tends to be especially appealing for those who feel that they do not need to take the mandated retirement distribution. (This should not be the main reason for purchasing)

Qualified Longevity Annuity Contracts – And the Downside

While the positives may seem enticing, there are negative situations that may arise.  If a person who purchased a QLAC never lived long enough to withdraw their income stream, there would be no growth on their contribution to leave to their heirs.  This can dramatically cut back the time value of one’s money.  If a person were to fund a QLAC in their late 60’s and pass away at age 84, more than 15 years of earning potential would have been erased.

Contrary to popular belief, QLAC’s are not a Medicaid compliant annuity tool.  While there is a bit of gray area here, if two spouses are covered under a QLAC and one is entering Medicaid, it is entirely possible that the healthy spouse’s income may be captured as part of the agreement.

One interesting way to look at them is turning the investment management platform into income planning into a period certain exercise (generally, 20 years from age 65 to age 85), this provides greater certainty for the needs during that period certain, and potentially allows some portfolio assets which won’t be needed for income to be redeployed and earmarked for very long-term investment (that is to say, investing for the time horizon of the client’s beneficiaries) for estate planning.

It should also be noted that QLAC’s are a commissionable insurance product and may lead to a conflict of interest with a financial professional.  In our practice, we have come across a few cases where people were misleadingly sold QLAC’s as a tax-deferral tool without considering the client’s health and longevity.

QLAC: Make It Part of Your Overall Financial Plan

When considering the purchase of a QLAC, it would be advisable to coordinate the purchase as part of a three-pronged plan which considers your estate plan, personal longevity, and the investment consequences of the purchase.  When used correctly, QLAC’s can be an invaluable tool to help cope with the challenge of retirees living longer and facing the fear of outliving their money.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group are separate entities from LPL Financial. *Deferred income annuity contracts are irrevocable, have no cash surrender value and no withdrawals are permitted. **Guarantees are subject to the claims-paying ability of the issuing insurance company.