Customizing Your QLAC
- There are lots of options to customize your QLAC so it fits your needs
- You can open joint policies with your spouse, guarantee that any unreturned premium is paid to beneficiaries, and that your income rises with inflation
The QLAC is like a pension you can buy for yourself from an insurance company using your pre-tax retirement savings, generating a guaranteed income that lasts as long as you do. Because of its special designation, income from QLACs can start later than 70 1/2, reducing the RMDs and associated taxes. It’s a great way to diversify your portfolio, and make sure that all, or most, of your basic retirement expenses will be covered for as long as you live.
Like any insurance or financial product, there’s a lot of room to customize and add features to your QLAC to meet your needs. The base product will provide the most income based on the premium you pay, your age and your gender. But extra features (sometimes called riders) can create better guarantees and be inclusive of your family dynamics.
While not every insurer will offer every option, here is an overview of what features you may encounter!
Single vs. Joint
You can have a QLAC just for yourself, or add your spouse to it.
- A Single Life policy will only pay income over the life of the one person on the contract.
- A Joint Life policy will pay income over the lives of both people on the contract.
- You can choose to reduce the income payment that the surviving spouse would receive after the death of the first. This will generate more income while both spouses are alive.
- You could also purchase a single life annuity and add your spouse as the beneficiary once you pass away
Income payout options
You can choose a further guarantee for the payments you want to receive:
- Life Only: income stops at death (or later of two deaths for joint).
- This is the default, base annuity.
- Life with Cash Refund: if the policyholder dies, the remaining difference between the premium paid and retirement income received will be given to the beneficiaries.
You can choose to receive income payments on a monthly, quarterly, semi-annual or annual schedule.
Inflation Adjustments to Payments
You can choose to have your income adjusted for inflation each year. It can be inflated between 1 – 5% or based on the Consumer Price Index. However, this will cause your income start point to be lower.
This feature is important because retirement can be long, and your income might lose purchasing power over time. 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. However, it’s not the most efficient way to hedge against inflation, 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.
To illustrate, let’s use David, our 65-year-old who wants to purchase a $125,000 QLAC with income starting at age 85. His initial quote excluded inflation protection and got him $4,550 per month ($54,600 per year). If he’d like his income payments to keep pace with inflation, estimating it to be 1% per year, he’ll have to accept a lower initial income of $4,350 per month ($52,000 per year) which will increase over time.
QLAC rates based on $125,000 New York Life life-only policies with and without a 1% increase rider for a male aged-65 with income starting at age 85. Rates as of 10/4/2017.
Protecting the Premium You’ve Already Invested
Also known as principal protection, the cash refund option mentioned above guarantees that any principal not yet paid back in the form of income payments will be returned to your beneficiary upon your passing.
QLAC rates based on $125,000 New York Life life-only policies with and without return of premium and death benefit riders for a male aged-65 with income starting at age 85. Rates as of 10/4/2017.
For example, if our 65-year-old pre-retiree David is worried about losing money in the event of prematurely passing away, he can add the return of premium and death benefit riders to his QLAC. His $125,000 QLAC policy will offer a lower monthly income to cover the cost of the richer guarantee, but any unrecognized value in the contract will be passed onto his heirs. Should David pass away before income payments begin, his $125,000 premium will be returned to his beneficiaries. If he passes away after income payments have begun but before those payments are cumulatively $125,000, his beneficiaries will receive $125,000 less the total income payments made.
Receiving Income Payments Early
QLACs are like paychecks rather than savings accounts, so the money you receive each month isn’t usually flexible. However, most insurance companies offer the option to receive the next few months of payments in advance, which can be useful in emergency situations. This benefit goes by many names: commutations, withdrawal benefits, or payment acceleration. Each insurance company has different rules as to how many months of payments you can receive at once, and how many times you can utilize the benefit.
While each insurance company may have some different versions, this is a fairly comprehensive overview of the features. If you have any questions, we’re here for you as fiduciaries!