Almost four years ago, the U.S. Treasury Department authorized qualified longevity annuity contracts (QLACs) for the 401(k) and the individual retirement account (IRA) markets to help workers save for retirement. And according to a recent article from InsuranceNewsNet, an uptick of interest, especially among high net worth clients, has been observed since. Robert Klein, founder and president of Retirement Income Center in Newport Beach, confirmed this trend in a recent interview.
“The primary purpose of each sale has been to provide sustainable lifetime income later in life,” said Klein.
QLACs, a special kind of deferred income annuity (DIA), saw about a 5% increase in requested quotes in 2016 when compared to the previous year, which means the goal of the Treasury Department might be actually working. When officials authorized the launch of QLACs in July 2014, the whole point was to give middle-market buyers an incentive to create their own pension.
“But there’s a second application that’s emerged and that is with the high net worth [segment] – that’s what I hear from some of our clients with regard to the increase in QLAC quotes,” said Gary Baker, CANNEX president and CEO.
He added that it appears that annuity specialists are using QLACs to develop tax strategies, as the average size of the policies sold tend to be larger than that for regular income annuities.
According to CANNEX USA, the number of deferred income annuity quotes continues to rise, and now QLAC searches are beginning to increase in the retail advisor channel too. But while quoting activity is increasing, DIA sales still only represent a small segment of the fixed annuity market, which sold $25 billion worth of products in the third quarter. In that same time, DIA sales fell 14% to $520 million compared with the year-ago period, according to LIMRA. Experts agree, for DIA sales to really take off, they need a boost from more buyers in the vast middle market, yet those buyers tend to be a bit leary of putting large amounts of retirement capital in a product they won’t have easy access to.
Key prospects for QLACs include buyers with retirement assets in the $500,000 to $2 million range, also known as the emerging affluent. Many advisors acknowledge that investing in a QLAC with much less than the $130,000 maximum doesn’t generate enough lifetime income, making it a less appropriate option. QLACs offer more advantages to those for whom $130,000 isn’t going to break the bank.
Some of those advantages include the reduction of required minimum distribution (RMD). A $1 million IRA could fund a $130,000 QLAC, making the new RMD calculation off the $870,000, as QLACs have no cash value and are therefore excluded from RMDs. Many retirees today have income guarantees already in place, thanks to Social Security and pensions. Those income streams should provide enough income, so the RMD forces retirees aged 70.5 and up to take income they don’t really need.
QLAC income streams do become taxable at a later date, but if the retiree passes away before taking income, the principal is returned to the beneficiaries. High net worth buyers are typically looking to solve the issue of longevity, not income, so investing $130,000 to fund life expectancy makes sense for them. Another bonus is that the fixed payments issued by QLACs make it simpler for retirees to plan and budget for medical expenses, prescription drugs and long-term care.
“If you buy it in your late 40s and defer until you are 80, you can get a sizeable income,” Klein stated.
Written by Rachel Summit