QLACs with COLAs

The 500# gorilla in any financial future is pending inflation.
The 500# gorilla in any financial future is pending inflation. Image By Paul Bradbury / OJO Images / Getty Images

What is a Qualified Longevity Annuity Contract?

QLACs are annuity products that can be used in a Traditional IRA for future pension type income. In addition, QLACs allow you to defer past age 70 ½ in your Traditional IRA (non-Roth), and potentially lessen the taxes on your Required Minimum Distributions, commonly called RMDs. QLACs were approved by the IRS and the Treasury Department in July of 2014.

They are quickly gaining popularity as people learn more about these simplistic transfer of risk strategies.

Inflation is looming, so it's important to consider when building your financial future plan.

The gorilla sitting in the corner of the room is the inflation gorilla. We all know that he is there, and will eventually make himself known. However, none of us know when inflation is going to hit and how drastic it will be, so planning for it is very tough.

Agents and advisors out there will tell you that they have a product that will address inflation. Let me be very clear about this when I say, there is NO product out there that efficiently addresses inflation. This applies to all of you gold and silver enthusiasts out there, and all of you annuity gunslinger agents are included as well!

Annuities and COLA Riders can help to address the effect of inflation on your financial future.

The only way annuities can be efficiently used to combat inflation is to stagger the income start dates.

  That is a fact. There is no product or annuity that “tracks” inflation. If there was such a product, we all would be selling it, and you would probably already own it!

Does it make sense to attach a COLA Rider to an annuity like a QLAC?

COLA stands for Cost of Living Adjustment, and you can attach a COLA rider (i.e. benefit) to a QLAC policy at the time of application.

You get to decide how much the annual increase will be every year, with the most popular choice being 3%. That means every year, your income stream will increase by 3% for the rest of your life.  Sounds fantastic in concept, huh?  Why would you choose not to have a COLA rider attached to your policy?

The contractual reality is that if you add a COLA to your QLAC policy, the annuity company will significantly lower the initial payout when compared to the same QLAC policy without a COLA.  I’m not saying you should not consider a COLA. I would advise you to look at QLAC quotes with and without a COLA so you can compare the numbers. Just remember that annuity and life insurance companies have the big buildings for a reason. They know when you are going to die based on actuarial tables, and they never give anything away for free. An attached rider increase will always lower the initial payout amount, while building in increased payment levels over time. 

If you are interested in a QLAC with or without an attached COLA, investigate all carriers offering them.

Not all QLAC products and carrier offerings are going to provide the choice of adding a COLA rider to their QLAC policy.  Some will, and some won’t, and this will be one of the ways that QLAC carriers will be competitive against the other carriers.

 QLACs are commodity products, and you should always shop all carriers to find the highest contractual guarantees for your specific situation.  Don’t let your agent or advisor show you one or two carriers. Don't pick your favorite carrier without investigating all offerings. Demand to see them all, so that you can make an informed decision. This takes any agenda the agent or advisor has out of the equation. 

You already own the best inflation annuity on the planet; it’s called Social Security.  

A QLAC provides guaranteed income payments that are as reliable as S.S. Guaranteed income is one way to weather the storm of inflation. Income payments that are guaranteed to increase are also a tool used to address inflation. If the contractual math makes sense, then a QLAC with an attached COLA might work for you.