The Good, Bad and Truth About QLACs

Low Commission QLACs are a Solid Product, and Only the Tip of the Iceberg as Annuity Sales Move Toward a Direct Sales Environment.
••• Low Commission QLACs are a Solid Product, and Only the Tip of the Iceberg as Annuity Sales Move Toward a Direct Sales Environment. Photo By Paul Souders / Fuse / Getty Images

Qualified Longevity Annuity Contracts (QLACs) were approved on July 1st of 2014 by the Labor and Treasury Departments for use in approved retirement plans and Traditional IRAs. This is a game-changing product for the annuity industry, and most agents aren’t even aware it exists because of the low commission paid. 

Many annuity products are sold based on the huge commissions, not necessarily on how appropriate the annuity is for the consumer. With the QLAC, however, it is all in the consumer's best interests.

How a QLAC Works

QLACs allow you to defer past age 70 ½ inside of a Traditional IRA, to guarantee an income stream that can be started as far out as age 85. You don’t have to defer it for that long, but you can. More importantly, the money in a QLAC is not considered as part of your RMD calculation when you turn 70 ½. That is a big deal, my friends. 

What that means in plain English is that your taxes will be lower on your RMDs. A QLAC is the only annuity type that can do this. For example, if you have a total IRA asset of $500,000, you can buy a $125,000 QLAC according to the current rules in place. 

When you go to calculate your RMDs, the total will be based on $375,000 instead of $500,000. Because of this lower amount, your RMD taxes will most likely be lower.

QLACs can be structured for a joint payout with your spouse, along with COLA (Cost of Living Adjustment) increases if you choose. You can also set up the contract so that 100% of any unused principal money goes to your listed beneficiaries, not the annuity company.

Anything Bad About QLACs?

The primary problem with QLACs is that you are limited in the amount of money you can place in the product. People often get disappointed when they hear the funding rules they have to follow. Currently, the ruling states that the maximum dollar amount you can place in a QLAC is the lesser of $125,000, or 25% of your IRA (non-Roth) total. 

Most people want to put more money into QLACs, but rules are rules. The Labor Department and the Treasury Department have indicated that they will raise the QLAC dollar limit over time, but have not given a specific date range.

Another issue with QLACs is that the strategy has no accumulation value. Some think this is a positive, but most short-sighted investors don’t because they mistakenly compare QLACs to investments. Annuities (including QLACs) are not investments. In other words, if you put $125,000 into a QLAC with the plan to take the income in 8 years, but you die in year 7, your beneficiaries get $125,000. 

A Move in the Right Direction 

Annuities aren't investments, they are structured to provide principal protection and income payments, and can help us plan for longevity, legacy, and long-term care needs. The QLAC product is very pro-consumer!

When QLACs were approved on July 1st of 2014, this was a total game changer for the archaic ‘good ole boy’ annuity industry. Just like when mutual funds were introduced inside of 401ks and eventually fueled the skyrocketing mutual fund industry, QLACs (i.e. Longevity Annuity structures) will eventually be the top-selling annuity type in the very near future. Some predict that will happen by 2020 and the consumer is the true winner here.

In addition, QLACs will be the driving force for annuities (of all types) to move toward a direct-to-consumer model. If you can buy an annuity without having to deal with a pesky high-pressure sales pitch from your agent, then it is a winner of an idea in the long run. 

You can't yet purchase a fixed annuity direct from a website, but you can visit Annuities.Direct to investigate all your options. Remember that education is the key to knowledge, and knowledge is the key to your financial health.