QLAC - Qualified Longevity Annuity Contract

QLACs are similar to other Longevity Annuities with definite qualities of their own.
QLACs are similar to other Longevity Annuities with definite qualities of their own. Image By Digital Vision / Getty Images

Qualified Longevity Annuity Contract, or QLAC

It has actually been around since 2004 but has just started to get some traction with the consumer in the last few years. This strategy is referred to as “Longevity Insurance”, in addition to being described as a Longevity Annuity, a Qualifying Longevity Annuity Contract, or a Deferred Income Annuity (DIA). The Department of the Treasury along with the IRS approved the use of this strategy within 401ks and IRAs as of July 2014.

increasing the opportunities this product provides.

The structure of the QLAC is similar to a Single Premium Immediate Annuity (SPIA). A QLAC has no annual fees and has a simplistic, easy to understand design that provides a guaranteed lifetime income stream starting at a future specified date. COLA (Cost of Living Adjustment) annual increases can be added at the time of application, with 100% of your principal fully protected if the policy is structured properly.  

Consider a QLAC for $ Held within 401k or IRA Plans

The ultimate good news for the QLAC product approval is that it allows young workers participating in 401ks to plan for future pension income needs. With some longevity annuity offerings, you can defer as long as 45 years or as short as 2 years.

In addition to young workers being able to take a portion of their 401k assets to allocate for future income, older American’s with traditional IRAs can plan for income to start as late as 85, and lessen their Required Minimum Distribution (RMD) annual amount in the process.

Money in a QLAC Is premium protected, but with No Growth

No annuity product is perfect, regardless of what most uninformed agents say. QLAC’s have their limitations, and a major one, for some, is the fact that there is no growth component during the deferral time period. For example, if you put $100,000 into a QLAC with the plan of turning on that income stream in 15 years and you passed away in year 10, your listed beneficiaries would receive $100,000.

The other possible negative is the possibility of locking in a low-interest rate for the life of the policy. No one knows where interest rates will go, so this is a key point to consider. Annuity companies are definitely aware of this concern and try to price the back-end payout level to take into account any implied yield needed to match the guarantee with a non-annuity product.

Guaranteed Lifetime Income Payments of SPIAs, DIAs, or QLACs

When the Treasure Department and IRS approved the use of QLACs in 401ks and IRAs, the annuity industry immediately scrambled to put the needed systems and paperwork in place so that people could actually take advantage of the new law. The product itself (Longevity Annuity or Deferred Income Annuity) has been around since 2004, but really did not catch on until 2011, in my opinion. The QLAC ruling will be looked upon by financial historians as the exact moment in time when the Longevity Annuity product type was legitimized. It might be the turning point for the annuity category as a whole because annuities are the only product on the planet that guarantee a lifetime income regardless of how long you live. ​

Good Annuities

The annuity industry has earned its bad reputation, by letting an unregulated sales force over promote and hype a too good to be true message.

The fact is that annuities do have their place in a portfolio; that place is right beside a pension or Social Security to provide a lifetime income stream. The future growth of the QLAC strategy will define the growing need for this transfer of risk lifetime income guarantee.