Marketwatch’s Stan Haithcock says that July 1 was “The day annuities changed forever,” in a recent article. That is the day that the Treasury Department and the IRS changed their rules to allow for the use of Qualified Longevity Annuity Contracts in 401k plans and IRAs. I’ve blogged about this ruling before because of its importance to the industry. Mr. Haithcock doesn’t think that the annuity industry has quite grasped the importance of this ruling yet. But his article tells us why it is so important and how good the impact will be for consumers. He goes so far as to call this ruling the defining moment for the annuity industry.
QLAC’s, which are also called longevity annuities and deferred income annuities, have been around for about a decade. They are simple products with no fees that provide a stream of lifetime income in the future. The agents selling annuity products have traditionally dictated what kinds of annuities are sold by carriers. This isn’t always in the best interest of consumers because some agents push for variable or indexed annuity products that have higher commissions. While variable and indexed annuities have their place in the industry and are good products for some consumers, there is a need for a simpler, less expensive annuity option. That is where longevity annuities come into play. Many advisors don’t concern themselves with these deferred income annuities because they are transparent and pay a low commission. Reputable annuity advocates are pushing for a more honest industry that is focused on providing consumers with the best products for them.
Everyone working with 401k plans and IRAs will now know how simple and effective QLAC’s are. This will become the annuity product that most people see and are familiar with, so longevity annuities will solve the problem of creating lifetime income for many more consumers. Although there are limits to the amount you can use to purchase a longevity annuity in retirement plans right now, those are likely to change quickly. As people educate themselves on the benefits of using longevity annuities in their 401k and IRA plans, they are more likely to use these types of annuities outside of those plans as well. Mr. Haithcock thinks that these longevity annuities will be the most popular type of annuity in the next five years because of their simple way to guarantee lifetime income.
One of the things that Mr. Haithcock likes most about these simple annuities is how straightforward they are for consumers. With indexed and variable annuities, there are a lot of hypotheticals. You know exactly what you are getting when it comes to longevity annuities. The industry has somewhat tainted variable and indexed annuity products by increasing their complexity. This ruling will hopefully be a turning point in the overall industry so that products become simpler again and more streamlined. It’s important for consumers and advisors alike to understand all of the details of their annuity products. These QLAC’s are similar to the simplest annuities, single premium immediate annuities. This ruling should in effect bring the entire industry back to the simplest form of annuities, which are easily understood, low commission and simple products.