Are Longevity Annuities on Your Radar?

[Brian Anderson]

Hearing a lot lately about how the path is clearing for QLACs to become a much bigger factor in retirement income planning.

Is this happening already, will it happen down the road when/if more employers start making them available in their plans, or do you not expect longevity annuities to make much of an impact?

Insurance Forums | New paper adds to building momentum for longevity annuities

 

[ScottLFB]

Maybe someone can help me understand what the QLAC is really going to do for people as I've seen articles for and against them. I talked to one of the carriers coming out with a QLAC a couple months ago and their view was that it's going to be "big" because their product was already approved in most states and that other carriers needed to first develop a product, so they were at least a few months ahead of the curve. But, that still doesn't tell me anything about it.

The big sell point is that you are allowed to not have to take RMDs on 25% of your IRA balances up to $125K max deferment.. This amount is supposed to adjust for inflation allowing another $10K added to the cap every 3yrs or so based on the 3% inflation average. But my question is this; When has the Government ever said "you know what, don't worry about the money we would receive in taxes off your RMD withdrawal, we don't need it now?" There has to be a catch to why the government is letting you defer the tax liability.

It seems like a few different scenarios are playing out here. 1-The government hopes that tax rates will increase by the time you turn 85 and are forced to start taking your RMDs on this money, which will yield the Government more money from your Tax liability. or 2-The Government knows you are in a lower tax bracket at retirement so they are allowing you to defer and hopefully die before age 85 so that the inheritance to your beneficiaries could be taxed and again net the government more of the money as tax income.

I asked those two questions to the Insurance Carrier and they danced around and couldn't give me a real sell point on this product type so I don't know if I would have a use for it..

I'm not saying I would be opposed to using it if someone could tell me some real world scenarios where a product like this could be useful. Especially in the low interest rate environment, low interest bearing deferred SPIAs aren't exactly flying off the shelves these days..

 

[Tahoe Ray]

These aren't new products...they're just now being mainstreamed into qualified accounts (previously most carriers required income start prior to age 70 1/2 or only allowed non-qual money) so I'll reference back to something that I said in another discussion about QLACs:

If you liked Deferred Income Annuities before, the QLAC ruling only makes them more attractive. If you didn't like the product, then I can't see selling them just for the RMD deferral.

DIAs are still a very small segment of the annuity market (a little over 1% through Q2 2014) and I would be surprised to see that market share "balloon" in any fashion. There is more qualified money than NQ for this product's market segment so I'm sure that sales will increase substantially, just not enough for the VA or FIA folks to care.

As to where they fit, I view these products as creating a "finish line" for one's income plan. One of the toughest variables for retirees to effectively manage is their asset allocation combined with a sustainable withdrawal rate...the challenge is that the "sustainability" of those two factors largely are influenced by a third, unknown, variable: longevity.

Using a DIA can allow the client/advisor to draw a line in the sand where they know that they just have to get to that point before the DIA turns on. The income that a DIA (longevity annuity) can produce is significant relative to the initial deposit, (assuming a 20+ year deferral into the client's 80s) thus freeing up the remainder of the portfolio to be fully distributed by that age, without having to worry (or at least worry less) about running out of money.

It takes a client's potential longevity (in this case, a negative) out of the picture. That alone is a pretty powerful and extremely helpful in managing the overall distribution plan.

Now that we'll have them fully accessible in qualified plans opens up this opportunity further...the no RMD feature is nice but again, I don't see that as the primary driver for new sales (although it will certainly be marketed that way).

Personally, I like them for the right situation.

 

[scagnt83]

Now that we'll have them fully accessible in qualified plans opens up this opportunity further...the no RMD feature is nice but again, I don't see that as the primary driver for new sales (although it will certainly be marketed that way).

This is where the real story is at. And in the long run it will only benefit 401k Advisors & Recordkeepers.

 

[StanTheInsMan]

The jury is out still.
I don't see the advantage other than lowering rmd factor by a max of $125,000 (which is minimal). Then those funds are set aside to be annuitized at a later date in a fixed rate only annuity for growth (no indexed options).