I have just turned 60 years old and am interested in a QLAC. Is it worthwhile to wait to see if interest rates increase in the next year or so, or should I start shopping now? Also, if I don’t live long enough to use most of my investment, is a return on death benefit a good deal?
As a certified financial planner, I get a lot of questions about annuities. The variations seem endless and I’m one of those geeks who loves digging into the details. A QLAC, or a qualified longevity annuity contract, is one of the simpler annuity arrangements.
QLACs: The Basics
You can buy a QLAC through a traditional IRA, 401(k) rollover or qualified retirement plan and choose when you want to start collecting payments in the future. Per IRS rules, you can use up to $135,000 or 25% of your total account holdings, whichever is lower, to buy QLACs during your lifetime.
QLACs have two main benefits:
- Lowering the balance of a tax-deferred retirement account, thus lowering the required minimum distributions (RMDs) you have to take annually starting at age 72
- Providing a stream of steady income beginning at a future date of your choice
But there are also downsides:
- Payments won’t increase if the stock market goes up
- QLACs are irrevocable and have no cash surrender value
- Women often receive smaller recurring payments because their average life expectancy is higher
You just turned 60, which is a great time to start looking at deferred annuities. Payments tend to be larger when there’s ample time between the purchase date and annuitization. The latest you can start collecting payments is at age 85.
How Interest Rates Affect Annuity Payments
The main point of comparison when shopping for a qualified longevity annuity is the future monthly payment.
How much an insurance company can offer you is based on a bunch of factors, including the firm’s own credit rating, your initial premium, any riders you add to the policy, when you start collecting, and yes, current interest rates.
The majority of Federal Reserve members project three interest rate hikes in 2022, so holding off for a rate boost sounds like a no-brainer. All else being equal, the higher the interest rate when you buy a QLAC, the bigger the future monthly payment. But rarely is it the case that all other variables are equal.
If waiting to snag a higher rate cuts time off of your deferral period, then you’ve altered the payout. In other words, if you’re set on collecting payments at a specific age but wait another year or two for a higher rate, your deferral period would shorten. A shorter deferral period means a smaller payment, and a slightly higher interest rate won’t make up for lost time. Insurance companies are profit-seeking enterprises, after all.
One strategy to consider if you can’t stand to miss out on higher rates is laddering QLACs. Purchasing several smaller QLACs over a few years and staggering your payment start dates could help you catch interest rates on the upswing.
Remember that a QLAC isn’t an investment, it’s an insurance contract. The chief goal is to protect your money rather than grow it. You may be able to earn a higher return waiting on interest rates to go up or investing in the stock market, but that would involve stomaching risk and mastering timing. The latter is near impossible. You know exactly what you’re going to get with a QLAC.
The catch with a QLAC is you can’t change your mind. Once you pay the premium and pass the free look period, it’s a done deal. You need to make sure you have plenty of cash and liquid investments to draw on until your payments start.
The Pros and Cons of a Death Benefit Rider
Longevity is the name of the game with a QLAC. The best candidate for this type of annuity is someone with good genes and a healthy lifestyle. The longer you live, the greater your return on investment.
Say you buy a QLAC with $100,000 today and start payments when you’re 80. Whether you live to 85 or 95, the insurance company has agreed to pay you for the rest of your life even if the sum of the payments outstrips your initial investment.
Of course, mortality has its own agenda. Adding a death benefit rider or refund option to a QLAC ensures that any unpaid amount up to the value of your premium will go to your beneficiaries. In exchange for that promise, the insurer will calculate a lower recurring payment for you. Structuring your QLAC as a joint life policy can also keep payments in effect after your death.
As a starting point, consider these quotes from the fixed annuity agency Blueprint Income: A 60-year-old male who buys a $100,000 life-only QLAC could, in a best case scenario, receive $22,368 annually starting in 20 years. A 60-year-old female could get $19,776 annually. A death benefit rider – or any rider, for that matter – would lower that stream of income.
I recommend comparing quotes for policies with and without a death benefit rider. Before you buy, consult a financial advisor who can review your full retirement plan. The worthiness of a QLAC, or any annuity, depends on the specifics on your situation.
Tanza Loudenback, CFP® is SmartAsset’s financial planning columnist, and answers reader questions on personal finance topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Tips for Retirement
- Working with a financial advisor provides more options to investors. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Annuities are a popular choice for retirees because they offer guaranteed income. Our retirement calculator will help you determine how much money you’ll need in retirement to pay your bills and enjoy your favorite activities.
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