When the IRS and the Department of the Treasury ruled on what a QLAC (Qualified Longevity Annuity Contract) is on July 1, 2014, they specifically excluded the complexity of other annuity products such as variable and indexed annuities. Why? To keep it simple for the consumer and limited to what insurance companies can build relative to products. Equally important, it kept the cost to the investor realistic and commission low to agents. Prior to the ruling, products were designed to be so complex with riders, and bells and whistles that no one understood them and probably no one really needed to. The complex products garnered larger commissions and as a result grew in sales. Unfortunately, many annuity agents sold the “annuity dream” to their clients, pocketing large commissions, fostered by the fear and greed of selling those “annuity dream” contracts.
Needless to say, the introduction of the QLAC with its low commissions, transparent design, and easy to understand consumer language, doesn’t excite much of the annuity industry. However, that is all the more reason for consumers to do their own homework and find the right design for their objectives, not the agent’s objective. In some cases, individuals aren’t even introduced to QLAC. Instead they are showed the “annuity dream” and sold an indexed or variable annuity. Why? That is a good question and one left for those agents to answer. Better yet, it leads to important questions for you, the consumer, to ask… “What about a QLAC? Wouldn’t that accomplish what I am looking for?” and “Can you show me how it works and give me an illustration relative to my age and amount deposited?” If they say no, or attempt to talk you out of that idea by selling you an indexed or variable annuity… leave the office and find someone who will explain it to you. Better yet, if they are sitting in your home just escort them to the door. Don’t buy into the over-hyped rider strategy for future guaranteed lifetime income in place of buying a QLAC. Ask the right questions to the agent relative to the offered contracts. Tell them you are aware of the difference in the contracts, and in the compensation, and please read everything before you sign anything! If what you are being told doesn’t make sense, just pass on the “annuity dream”. If you want, call the annuity company and have them explain the differences to you.
QLAC is the game changer in the annuity world. Once people understand the simplicity and efficiency of the qualified longevity annuities they will want more information and most likely want to add one to their traditional IRA, or other participating qualified plan. Even though the current QLAC rules limit participation to the lesser of $125,000 or 25% of a qualified account, this amount may increase in the future when retirees pressure their Washington DC representatives for more tax benefits. Remember, a QLAC guarantees a lifetime income stream and doesn’t need to start until as late as age 85!
We are thankful for the QLAC ruling of July 1, 2014. It is a game changer for the consumer who has finally been introduced to a product that works in their favor.