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QLACs: Life Only or Life with Cash Refund?

Over the past couple of years, Qualified Longevity Annuity Contracts (QLACs) have grown in importance because of changing government regulations. QLACs have two important benefits that have added to their increasing popularity. They pay a future stream of guaranteed lifetime income and help you lower the taxes for Required Minimum Distributions when you have a traditional IRA. In Stan Haithcock’s Marketwatch article “The two best ways to structure a QLAC,” he gave the benefits and drawbacks of what he considers the best ways to contractually structure a QLAC.

Back in 2014, the Treasury Department and the IRS began allowing the use of QLACs within qualified retirement plans. You can buy a QLAC with the lesser amount of $125,000 or 25% of your retirement account assets. The income stream you receive from this QLAC can be deferred as late as age 85 or received as early as age 71. Your QLAC dollars aren’t subject to Required Minimum Distribution (RMD) rules, so they save you on taxes. The income you receive later in life can be used to pay your monthly expenses, which eliminates your longevity risk in life.

The first option that Mr. Haithcock recommends with a QLAC is the “life only” option. This gives you the highest amount of income payments and guarantees that you will never outlive your money. After you start receiving the income, the balance in the QLAC no longer belongs to you and disappears if you die before receiving all of your principal paid back to you. If you aren’t worried about leaving the balance of your QLAC funds as a legacy, the “life only” option will allow you to receive the highest level of income possible. You can also choose to have a “joint life only” policy that will pay out for as long as both you and your spouse live. This option is allowed even if the qualified retirement funds are only in your name. A “life only” with return of premium option will pay your premium to your listed beneficiaries if you die before starting your income stream.

“Life with cash refund” is the most popular option chosen with QLACs. Mr. Haithcock prefers to call it the life with balance refund option because any remaining account balance is paid out to your heirs when you die. That means that the insurance company doesn’t keep the remaining balance if you die before receiving your money back in income. You are still guaranteed lifetime income from your QLAC with this option. This can be structured as a “joint life with cash refund” so that both you and your spouse will receive income until the last one of you dies. In this case, your family would still get any remaining premium after both deaths. The income payouts are less when you choose the “life with cash refund” option, but some people prefer receiving less income to know that all their retirement savings will go to them or their family rather than an insurance company.

The lifetime income guarantee paid from your QLAC is based on your age and life expectancy. You are transferring your longevity risk to an insurance company and creating your own contractual pension with an annuity. As with any annuity, it is important to receive multiple quotes from different companies before deciding to make a purchase. QLACs offer required minimum distribution relief and guaranteed lifetime income with your qualified retirement savings. You can opt for a “life only” or “life with cash refund” option depending on your personal needs. QLACs can be a great option to create income with your traditional IRA or 401k savings.

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