Do you begin your client meetings with this question: “What is the date you’re going to die?”

Probably not. But it sure would be nice to know from a planning perspective, wouldn’t it? “Tell me how long you’re going to live and I can create the perfect financial plan to ensure you don’t run out of money in retirement.”

One particular type of longevity annuity eliminates that unknown variable: Qualified Longevity Annuity Contracts (QLACs for short). It’s a mouthful, but they’re actually quite simple.

QLACs are somewhat of a cross between deferred annuities and immediate annuities (that’s the A in QLAC: annuity). You can think of them as a pension that starts paying when you’re much older, supplementing other retirement solutions like Social Security. Simply put: they’re a hedge against outliving assets. That’s the longevity part.

What about the qualified part?

To be considered qualifying, the IRS introduced specific requirements in 2014 that these contracts must satisfy (yes, they’re insurance contracts, so that takes care of the contracts part):

• The value of a QLAC must be excluded from the account balance used to determine required minimum distributions (RMDs)
• Distributions must begin by age 85
• Participants’ single premium can be up to 25% of their qualified account balances, or $125,000, whichever is less

What are the main benefits to QLACs?

• They’re great tools for advisors because they give you a finite period to plan for (so you’ll never have to ask “What is the date you’re going to die?”)
• They transfer risk from the market to the insurance company
• They satisfy income needs post-age 85
• Which means the rest of your client’s portfolio can be investment, liquidity, and legacy planning
• They’re one way to control volatility

Which clients should get a QLAC? To assess this, ask them these questions:

• Risk Capacity: How does your spending compare to your fixed income streams and net worth? (if their income stream looks like it might trickle down later in life, a QLAC can provide them with additional income when it’s needed most)
• Liquidity: How much of your net worth is liquid? (if they may have a liquidity problem later in life, a QLAC can provide income at a critical moment, avoiding a “fire sale” of illiquid assets)
• Risk Preference: Balanced portfolio or fixed annuity? (the QLAC works great if they’re conservative investors; it’s another tool to provide guaranteed income)
• Legacy: Do you want to leave money to your loved ones or favorite charity? (QLACs provide an income stream to beneficiaries; or your clients can add a death benefit that would pay a lump sum of the original premium if they pass away before payments begin)
• Health: Is there a history of longevity in your family? (if the answer is “no,” then a QLAC is not for them)

To help you and your clients assess the right tool for their retirement needs, contact Jerry Skapyak, annuity and hybrids specialist.