QLAC Options & Payout Drivers
The income offered on QLACs will vary over time as market conditions change, being driven most notably by longer-term Treasury and investment grade corporate bond yields. In addition, your personal attributes (age, gender) and the policy options you select will impact the quote.
Understanding how your personal attributes and the options you select drive quotes enables you to structure the policy to best suit your needs. Expect to have to think about the following when evaluating a QLAC:
Income will decline as you age. The longer you wait to buy, the less time the insurance company will have to invest your premium before beginning income payments. Holding all else equal, buying income today will be cheaper than buying the same amount in the future.
Income will be higher for males than females. Because women have longer life expectancies than men, the income women receive each year will be smaller.
Income will increase with higher premiums. A portion of the insurance company’s expenses incurred are fixed per contract such that incremental premium can go entirely towards buying income. Said another way, there is usually a discount for larger premium deposits. There are a number of insurers, on the other hand, that price in a linear fashion. That means that small purchases get the same relative value as large purchases. Where or not an insurer prices this way is noted in the details of the quotes.
Single vs. Joint Life
Income will be higher for single life than joint life policies. A joint life policy will provide income as long as either person is alive, which is almost certainly longer than if contingent on one person.
The income level following the loss of the first life can be designed to remain level or decrease. Opting to reduce the income upon the passing of the first spouse (typically to 40-99% of the starting income level) allows for a greater income level while both are alive.
An alternative to buying a joint life annuity is to purchase a single life annuity with a Refund at Death (a.k.a. cash refund or death benefit) and designate your spouse as the beneficiary. Upon your passing, he/she will have the option to continue the contract in his/her name until the benefit has been paid out.
Income can be based purely on lifespan or can have a guaranteed component:
- Life Only: payments stop at death (or later of two deaths for joint)
- Life with Refund at Death: additional guarantee over life only that pays beneficiaries the difference between the premium and sum of all payments already received upon insured’s death
Income will be lower for richer guarantees. Adding a Refund at Death increases the amount the insurer expects to pay you. To compensate for the extra guarantee, they will need to lower the recurring payments.
Most insurance carriers offer an inflation adjustment or annual increase rider that will adjust the QLAC income payments annually for inflation. The adjustment made could be predetermined (between 1-5%) or in some cases be based on a Consumer Price Index. Providing these increases will require a lower starting income.
Because inflation affects the purchasing power of money, it presents a challenge for retirement, which could last 40 years. While we’re currently experiencing a period of low inflation, it’s averaged 3.2% over the past century, meaning that prices have almost doubled every 20 years.
Adding an inflation rider to your QLAC is one way to mitigate the risk of declining purchase power, but it’s probably not the most efficient way as the extra protection will come at a cost. Consider instead more direct ways to earn inflation-adjusted dollars. Your Social Security benefit, for one, will be indexed for inflation through a Cost of Living Adjustment. And, for the rest of your assets, maintaining exposure to equity markets and investing in inflation-linked bonds, such as TIPS or I-Bonds, can provide an effective hedge.
Depending on the product, you may see some other benefits included in the QLAC. These benefits are generally included in the cost of the annuity. Some examples include:
- Income Start Date Adjustment: Many insurers will afford you the one time opportunity to move up or back your income start date by up to 5 years.
- Additional Premium Payments (Flexible or Subscription): With some carriers you have the ability to fund your QLAC over time, either through a flexible premium option or on a subscription basis. This is a good approach for those betting on pricing improvements or anticipating converting more of their IRA into income as it grows over time.
Insurer Credit Rating
Finally, you’ll usually notice an inverse relationship between the creditworthiness of an insurer and the income they offer. Insurers with higher credit ratings have earned them by maintaining higher capital reserves and more conservative investment portfolios limiting their profitability and thus the income they can offer you. Only QLACs from highly-rated insurers (A.M. Best rating of at least A) make the cut for inclusion on the Blueprint Income platform. And, even among the insurers we’ve decided to work with, it’s worth distinguishing among the levels of financial strength. The guaranteed income you’re promised is only as good as the financial strength and longevity of the insurer backing it.